The Federal Reserve faces a simple decision when it meets this week—to do nothing—but everything after this week's meeting is subject to change.

Currently, central banks are grappling with the still uncertain impact of the war with Iran, whose energy price shocks could reignite inflation. Meanwhile, the economic outlook remains equally unclear: will the economy decline if consumers begin to reduce spending, or will growth continue on track?

This uncertainty comes at a time of transition for central banks. Jerome Powell, who has led the Federal Reserve since 2018, is about to hand over power to former Federal Reserve Governor Kevin Warsh .

Analysts say the Federal Reserve can remain patient and keep interest rates unchanged given the uncertain outlook and the continued robust U.S. economy.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, wrote: “The real economy continues to expand, the stock market is near record highs, and the sticky part of inflation remains. This is the ideal backdrop for the Federal Open Market Committee (FOMC) to keep policy rates unchanged until it gains greater clarity.”

Why is this important?

Uncertainty surrounding inflation and global conflicts could delay interest rate cuts, thereby affecting borrowing costs and investment decisions for consumers and markets.

The market widely expects the Federal Reserve to maintain the target range for the federal funds rate at 3.5% to 3.75% in the coming months. The deadlock in US-Iran peace talks last weekend led to a continued sharp rise in oil prices this week, with some believing the risk of a prolonged energy supply disruption is increasing.

The market is looking for clues.

The market will be focused on Powell's press conference at 2:30 p.m. ET on Wednesday (2:30 a.m. Thursday Beijing time) for signals on how the Federal Reserve will respond to future risks.

In recent days, Federal Reserve officials have expressed concerns about inflation, noting that after the price surge in 2021 and 2022, inflation has never fully returned to the Fed's 2% target. Analysts believe their inflation concerns are somewhat hawkish, which may make some Fed officials more hesitant about the planned interest rate cut in 2026 (especially before the outbreak of war).

Powell may use a similar tone at the press conference.

Barclays' chief U.S. economist, Marc Giannoni, wrote: "We expect Chairman Powell's tone to be slightly hawkish. He may suggest that the FOMC is in a wait-and-see mode, which allows it to better address the risks on both sides of the Fed's dual mandate of full employment and price stability."

According to CME Group's FedWatch tool (based on futures market pricing), traders believe there is an 80% probability that the Federal Reserve will keep interest rates unchanged throughout the year, and a 20% probability that it will cut rates at least once. This indicates that the market remains somewhat optimistic that the Fed will resume rate cuts after the 2024-2025 rate-cutting cycle.

However, analysts say the risk of the Federal Reserve delaying interest rate cuts is rising.

"Our baseline forecast remains two Fed rate cuts this year, but the likelihood of those cuts being postponed to later is increasing," wrote Nancy Vanden Houten, chief U.S. economist at Oxford Economics.

The market believes that the likelihood of the Federal Reserve raising interest rates is extremely low, but some analysts warn that the risk of a rate hike still exists if the war continues for an extended period.

James Egelhof, chief U.S. economist at BNP Paribas, said: "If the Strait of Hormuz remains closed and U.S. labor data remains strong, we are seeing an increasing tail risk that policymakers may consider raising interest rates as early as June."

Two-way risk?

Analysts will also look for clues in statements released by the Federal Open Market Committee (FOMC).

A key question is: Will the FOMC issue guidance that its next action could be a rate cut or a rate hike? This would be a significant shift from its current stance of "leaning towards another rate cut."

The current FOMC statement mentions considering "additional adjustments" to interest rates, suggesting that further rate cuts are still more likely. However, analysts believe the statement may remove the word "additional," implying that interest rates can be adjusted in any direction.

This doesn't mean a rate hike is imminent—far from it. This change will indicate that the FOMC "has a more balanced view on the next interest rate action," Giannoni said, sending a subtle but important signal: rate cuts are no longer the default option.

Analysts also pointed out that the Federal Reserve may not be in a hurry to send a clear signal at present.

"Officials may not want to amend their statements only to have to reverse them shortly afterward," wrote Matthew Luzzetti, chief U.S. economist at Deutsche Bank. "Therefore, we believe June would be a better time to make such adjustments, when officials should have a clearer understanding."

Powell's "Last Dance"

Reporters will certainly ask Powell questions about the upcoming leadership transition, as his term as Federal Reserve Chairman will end in mid-May.

Warsh's nomination appears to be back on track after the Justice Department dropped its criminal investigation into cost overruns at the Federal Reserve headquarters renovation project. The investigation had previously raised concerns among a key Republican on the Senate Banking Committee, who believed it was politically motivated (given President Trump's previous criticism of the Fed).

With the investigation dismissed, the committee has scheduled a vote on Warsh's nomination for Wednesday. A full Senate vote will follow in the coming weeks.

"The vote will be very close, but Walsh will almost certainly be confirmed," wrote Ian Katz, a policy analyst at Capital Alpha Partners.

A major question for Powell is whether he will remain with the Federal Reserve after mid-May, as his term as a governor runs until 2028. Powell has not yet revealed his plans after mid-May, but he has stated that he has "no intention of leaving the council until the investigation is fully concluded."

If he remains on the board, it will reduce Trump's opportunity to appoint a Federal Reserve member.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, pointed out that the Justice Department's investigation "can be restarted as quickly as it was stopped," which could put pressure on Powell.

Tombs said, "If this matter does not come to a clear conclusion, Mr. Powell may consider it his duty to remain on the FOMC until his term as governor expires in January 2028."