By Nick Timiraos

WASHINGTON -- Federal Reserve officials extended an interest-rate pause on Wednesday that revealed bigger divisions over whether to hint that further interest rate cuts are possible, marking a contentious conclusion to Jerome Powell's eight-year chairmanship.

Officials held their benchmark federal-funds rate steady in a range of 3.5% to 3.75% and, in their policy statement, made no changes to language adopted last fall that signaled the next move in rates was more likely to be down than up.

At their previous meeting in March, a majority of officials penciled in At their previous meeting in March, a majority of officials penciled in slightly lower interest rates by year-end. But over the past month, policymakers flagged how new inflation risks could warrant an even longer pause on interest rates, particularly given how the Iran war raises the specter of higher embedded energy costs rather than a one-off shock.

That could delay or derail the final steps of a recalibration the Fed initiated two years ago to dial back the higher rates it had imposed to slow the economy and combat much higher inflation in 2022-23. A few officials have even outlined scenarios that could warrant rate increases. by year-end. But over the past month, policymakers flagged how new inflation risks could warrant an even longer pause on interest rates, particularly given how the Iran war raises the specter of higher embedded energy costs rather than a one-off shock.

That could delay or derail the final steps of a recalibration the Fed initiated two years ago to dial back the higher rates it had imposed to slow the economy and combat much higher inflation in 2022-23. A few officials have even outlined scenarios that could warrant rate increases.

Changing of the guard

Wednesday's meeting effectively closes an era at the central bank spanning two decades. Powell, whose term as chair expires on May 15, adopted and added his own stamp on a framework for setting and communicating monetary policy that his immediate predecessors, Ben Bernanke and Janet Yellen, designed in the years after the 2008-09 financial crisis.

Under that framework, the Fed leaned more heavily on public communications to articulate how it planned to meet its objectives of healthy labor markets and low inflation. It also sought to enlist financial markets as a partner in tightening or easing before officials moved rates.

The strategy, centered around formally adopting a 2% inflation target, sought to convince the public that the Fed's commitment to its goals was firmer than any particular tool for achieving them. The high inflation that followed the 2020 pandemic delivered the most demanding test of this inflation-targeting framework, and one that appeared to be succeeding until tariffs interrupted progress last year.

The ultimate verdict on that strategy is likely to be shaped by Kevin Warsh, the former Fed governor whom President Trump selected to succeed Powell. Warsh, whose nomination advanced through the Senate Banking Committee on Wednesday morning, used his confirmation hearing last week to signal that big changes are in store -- not just to the inertial, data-driven approach that defined the Powell years but also to its overarching framework.

The last mile on inflation

For all the ambitious changes Warsh has in mind, he will inherit a more immediate challenge: The economy is absorbing its fourth supply shock in five years. The Middle East conflict and last year's tariffs have hit an economy where a key inflation metric peaked at 7% in 2022 after the pandemic reopening and the war in Ukraine. The cumulative effects are testing the Fed's confidence that inflation, which is running around 3%, will return all the way to its 2% goal.

Officials are puzzling over possible explanations, each with different implications for where to set rates. The first, and the one most widely cited by the Fed, is that goods-price increases attributed to tariffs will soon fade, putting disinflation back on track. Another possibility is that current monetary policy isn't as restrictive as officials had thought, which would argue for keeping rates at least at current levels for longer.

The most unsettling scenario is that businesses have grown more willing and able to pass higher costs through to customers, a behavioral shift that would mark a meaningful break from the prepandemic environment in which firms absorbed cost increases to avoid losing market share.

The Middle East turmoil complicates any diagnosis. With energy prices raising headline inflation, officials may not be able to tell for months whether underlying price pressures are fading, persisting or getting worse.

"Right now, core inflation is running at 3% or above, and they think there's a special story," said Kurt Lewis, a former senior adviser to Powell, referring to the Fed's view that tariffs likely explain higher goods inflation since last summer. If that special story is wrong, he said, the Fed has "to come to grips with that" by acknowledging rates may not be high enough to bring down inflation.

"I think they would do that slowly," said Lewis, who is now head of central bank policy at Piper Sandler.

The fight Warsh inherits

The leadership handoff is also unfolding at a moment of unprecedented institutional strain. Fed officials have twice over the last year turned to the courts to push back on Trump's pressure to lower rates and to replace officials standing in his way. Fed governor Lisa Cook has been allowed to stay in her job after she fought the president's attempt to remove her. The Supreme Court has yet to issue a ruling after hearing arguments in January.

The Justice Department last week suspended a criminal investigation of Powell and his handling of building renovations. Powell had mounted a successful behind-closed-doors legal challenge of two subpoenas, and the Senate had separately threatened to indefinitely delay Warsh's confirmation until the probe ended.

Powell, like Warsh, was named chair by Trump. But Warsh's challenge could be sharper. The selection process Trump ran last year, in which he repeatedly insisted that whomever he picked would agree to cut rates, risked compromising the standing of any nominee.

The courts and the Senate have shored up the Fed's institutional discretion. The appointment process, however, is the president's legitimate way to shape policy. Whether the courts and the Senate provide Warsh with the cover to disappoint the president who appointed him is a different question.