Federal Reserve officials will release their policy decision on Wednesday as the war in the Middle East reaches the two-month mark, creating continued uncertainty about the impact on the economy. It’s likely to keep the central bank holding interest rates where they are.

“There’s still uncertainty about how this war is going to be resolved, and oil prices have been volatile. But they’re still well above where they were before the war started, and so that will eventually have an impact on the economy,” former Cleveland Federal Reserve president Loretta Mester said.

Policymakers are weighing the war’s impact on inflation and growth as they meet this week, waiting to see how severe it will be, depending on how long the war lasts.

Esther George, former president of the Kansas City Federal Reserve, said there’s a sense that the ripple effects will be felt through the summer and into the fall, keeping oil prices higher and impacting supplies.

So far, the official data shows that inflation overall has shot up because gas prices have soared, but the higher energy prices haven’t so far bled through to prices of goods and services.

Read more: March CPI breakdown: Iran war sends gas prices skyrocketing, airfare climbing

Mester said she thinks the Fed needs to be cautious about that bleed-through. “That’s what they’re going to focus on at this meeting,” she said.

The Fed hasn’t changed its bias away from rate cuts, and officials haven’t seriously considered raising rates either.

“I think what this does for them is to say, ‘We’re going to just have to stay on hold and kind of look for a window to cut,’ because they haven’t really changed that bias in their calculation,” George said. “I still think the Fed Funds Rate is slightly elevated, and so I think it puts them on hold if not for the whole year, at least well into the second half.”

Fed officials are looking at inflation measures to gauge how broad-based the inflationary pressures from the recent oil price increases are. Officials are willing to look through an uptick in inflation if it’s limited to gas prices.

“If it’s just higher gasoline prices, I don’t think that shifts the bias, though it may keep them on hold longer,” George said. “It’s really looking [at] where else are we seeing inflation picking up.”

Read more: What an extended war with Iran could mean for gas prices

Mester said she expects a bigger impact on inflation over the next several months, even after the Strait of Hormuz opens, because it’s going to take some time for the oil to get to its destination.

“With several more months of elevated inflation, the question that the committee has to confront is, should they be looking through that or should they be really entertaining that this could be longer lasting and feed into underlying inflation,” she said.

Watching inflation through oil prices

One of the lessons the Fed gleaned from the pandemic is that just because higher inflation is driven by a supply shock doesn’t mean it will be short-lived.

Since the pandemic, tariffs have pushed up the prices of goods, leading to higher overall inflation. Now, oil prices threaten to push up overall prices. The Fed’s campaign to lower rates has been based on the premise that inflation is on a downward trajectory and that one-off events, like tariffs or an oil shock, are ones that the central bank could look through.

Read more: It’s not just gas prices. How the Iran war is coming for your grocery bill.

Fed governor Chris Waller, who has favored rate cuts, recently questioned when, after a series of one-time shocks, inflation becomes persistent rather than a one-time increase.

The Fed has also taken comfort in long-term inflation expectations remaining low. But with inflation remaining above the Fed’s 2% goal for five years, tariffs pushing up goods prices, followed by the oil shock from the Middle East conflict, the question is how can people’s long-term expectations for inflation remain around 2%.

“Remember this whole campaign for the last five years has been premised on inflation expectations are well anchored, and I just think that’s getting to be a shakier platform as we go forward with an inflation rate that was already higher,” George said.

Luke Tilley, chief economist at Wilmington Trust, also expects the Fed to hold the line again on Wednesday. But he cautioned that the longer the conflict lasts and energy prices remain high, the greater the chance that higher prices will hurt economic growth more than cause higher inflation.

Tilley noted that through April 15, tax refunds were up 20% to $45 billion from last year, but daily gasoline usage was eating up about a third of the refunds, reducing the stimulative impact on the economy. That doesn’t include businesses that are paying for higher diesel fuel costs.

And while markets have taken any rate cuts off the table for the year, Tilley still sees three cuts this year that could start as soon as July, because he thinks higher energy prices will hurt consumer spending, dampening growth.

“If you don’t have strong enough growth or strong enough consumers, then you can’t have enduring inflation because they will spend less,” Tilley said. “They will cut back. Firms will see that. They will cut jobs, but they’ll also stop pushing through the price increases to try and preserve their market share, and you get slower inflation.”

He added, “All of the supply components are there to push up prices, and none of the demand components are there.”

He said the story for the Fed this year is a repeat of last year. A year ago, Tilley said tariffs would hurt growth and the Fed would end up cutting later in the year. The Fed held rates last year through the summer, then cut rates three times last fall. He expects a similar playbook this year, only with higher oil prices as the catalyst.

“You could replace the word oil with tariffs,” Tilley said.

But Mester said the Fed will have to be careful about resuming rate cuts prematurely.

“If I were them, I would need to see much more convincing evidence that we’ve gotten beyond the upside factors supporting higher inflation — and I’ve not seen inflation actually moving down on its path towards 2% — before I’d be comfortable resuming rate cuts,” she said.

This week’s meeting will potentially be Jerome Powell’s last as chair of the Fed. If his successor, Kevin Warsh, is not confirmed by May 15, the official end of Powell’s term, Powell has said he will stay on as chair pro tem.

A major obstacle to Warsh’s confirmation was cleared Friday when the Justice Department dropped a criminal investigation of Powell and referred the matter to the Fed’s Inspector General. Warsh had no path to confirmation in the Senate with that criminal probe unresolved. Powell could still remain at the Fed after next month as a governor.

“The Fed is going to sit tight,” said Wilmington Trust senior bond fund manager Wil Stith. “They’re going to say the exact same thing as last meeting. Powell wants to leave Warsh with as much flexibility as he can.”

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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