FOMC meeting, March 17-18

Who let the hawks out? 

• The Federal Reserve kept the federal funds rate unchanged at a target range of 3.50%–3.75% at the March 17–18 Federal Open Market Committee (FOMC) meeting. Only Governor Stephen Miran dissented in favor of additional easing, while Governor Christopher Waller — who had been seen as another likely dissenter given weak labor market conditions — aligned with the consensus. This signals increased concern among policymakers about the inflation implications of the Middle East conflict.
  
  
• Fed Chair Jerome Powell said little and appeared non-committal during the press conference. He reiterated that, with policy close to neutral — or even slightly restrictive — the Fed is in a good position to “wait and see” how yet another supply shock will influence economic activity. He emphasized that the first shock to monitor is tariffs and noted that, while the implications of the Middle East conflict remain “uncertain,” inflation is likely to move higher.
  
  
• The current Fed stance is clear. With core inflation well above the Fed’s 2% target and little evidence of a decisive and sustained move toward that goal, policymakers will maintain their current policy setting. Scenario discussions took place during the meeting, including the possibility of introducing a two-sided statement, but officials appear inclined to defer any meaningful change in their reaction function until the next meeting.
  
  
• Powell also addressed his future, noting that if his successor is not confirmed by the end of his term (May 15, 2026), he would remain Fed Chair pro tempore, as the law allows. He stressed that he has no intention of leaving the Board of Governors until the Department of Justice (DOJ) investigation “is well and truly over with transparency and finality.” As for whether he would remain a governor after his chairmanship ends, he indicated that no decision has been made.
  
  
• In light of upside risks to inflation and a hawkish “once burned, twice cautious” stance among most Fed officials, our baseline features only one 25 basis points (bps) rate cut in 2026, likely in December. It is entirely plausible that the Fed delivers no rate cuts this year, and there is a non-negligible chance that a rate hike — not a cut — could be the next policy move.

The policy statement noted that economic activity continues to expand at a “solid” pace, job gains have “remained low,” inflation remains “elevated,” and unemployment is “little changed.” The Committee was non-committal on the Middle East conflict, stating only that its implications for the US economy are “uncertain.” Guidance regarding the “extent and timing” of further adjustments was unchanged, signaling policymakers’ comfort with maintaining a pause.

Before the Middle East conflict and the subsequent surge in commodity prices, most Fed officials argued that policy was well positioned to support a patient approach until inflation showed clearer progress toward 2%. Powell confirmed that he viewed policy “at the high end of neutral or perhaps mildly, even modestly restrictive.” Few policymakers appear willing to risk shifting toward a more accommodative stance amid persistent supply-side shocks. The oil-price shock has reinforced the Committee’s hawkish tilt, with Waller — who had been widely expected to dissent on the back of ongoing labor market weakness — ultimately deciding not to support additional easing.

In normal times, the Fed’s textbook response would be to look through a transitory energy price shock. But three factors are likely to keep policymakers on a more hawkish footing. First, for many officials, the experience of reacting too late to what was initially deemed a transitory inflation shock post-pandemic still lingers. Chicago Fed President Austan Goolsbee recently invoked the lessons of 2021, cautioning that policymakers “have been burned before by assuming transitory inflation.”

Second, the destruction of oil production and refining capacity, as well as liquefied natural gas (LNG) fields and liquefaction facilities, suggests the Middle East conflict could leave a more persistent imprint on inflation beyond near-term energy flow disruptions.

Third, this is not a supply shock in isolation — it is a cumulative supply-stack shock, combining negative impulses from tariffs and immigration constraints with a positive supply impulse from AI. The net effect is a more complex and potentially more persistent inflation dynamic.

During the press conference, Powell said “we don’t know” at least 14 times and used the term “wait-and-see” another four times, signaling no desire to preemptively adjust monetary policy given the “uncertain” implications of the Middle East conflict. Unlike Governor Miran and Fed Chair nominee Kevin Warsh — who have argued for a more forward-looking policy approach that anticipates stronger productivity growth from AI and lower inflation — most current policymakers appear inclined to remain data-dependent, which is likely the appropriate approach in a supply-shock-driven environment.

In that regard, Powell appeared particularly focused on the remaining pass-through of tariffs to inflation, the lack of disinflation progress in core non-housing services, and the risk of rising inflation expectations.

Powell also addressed whether there had been discussion of including a two-sided statement that would explicitly bring rate hikes back into consideration. He noted that “the possibility that our next move might be an increase did come up at the meeting, as it did the last meeting. But the vast majority of participants don't see that as their base case.”

He added that the meeting included discussions of alternative scenarios but avoided elaborating further, stating: “I wouldn’t bring it in here. It is very uncertain. I want us to remember that we don’t know.”

Summary of Economic Projections and dot plot

The Summary of Economic Projections revealed higher growth and inflation expectations for 2026, which do not appear entirely sensible or internally consistent. Presumably, some officials incorporated a higher inflation and lower growth outlook in response to the Middle East conflict, while others anticipate stronger growth and lower inflation driven by AI-related productivity gains. As a result, the median estimate offers limited informational value.

What is more constructive is the upward revision to long-term GDP growth expectations, now at 2.0% from 1.8%. This suggests a growing consensus around stronger productivity dynamics, lifting potential growth over the longer run. In that context, the long-term neutral rate was also revised modestly higher to 3.1%, pushing back against Governor Miran’s view that stronger productivity would be sufficiently disinflationary to lower the neutral rate.

Overall, the dot plot of median rate expectations highlights a deeply divided FOMC. Seven policymakers favor no rate cuts in 2026, while seven support one rate cut. Five officials see two or more cuts this year. The dispersion for next year is even more striking, with one official anticipating a rate hike and the most dovish participant projecting five cuts relative to the current policy stance.

Powell’s future

Powell’s term as Fed Chair ends on May 15, 2026, but his term as a governor runs through January 31, 2028, meaning he could remain on the Board after stepping down as Chair. Senator Thom Tillis has stated he will not advance any Fed nominees — including Chair-nominee Kevin Warsh — until the DOJ completes its criminal probe into Powell, potentially delaying confirmation. A federal judge in Washington, DC, has blocked DOJ subpoenas, though the DOJ has requested reconsideration.

Powell also addressed his future, noting that if his successor is not confirmed by the end of his term (May 15, 2026), he would remain Fed Chair pro tempore, as the law allows. He stressed that he has no intention of leaving the Board of Governors until the DOJ investigation “is well and truly over with transparency and finality.” As for whether he would remain a governor after his chairmanship ends, he indicated that no decision has been made.

We view the probability that Powell serves out at least part of his governor term into 2027 as relatively high.

Our outlook

We have revised our personal consumption expenditures (PCE) inflation forecast to 2.9% year over year (y/y) in Q4, about 0.4 percentage point (ppt) above last month’s projection. We have also lowered our 2026 GDP growth forecast by 0.2ppt as a result of the conflict, and by an additional 0.2ppt due to weaker growth in Q4 2025 and slower momentum heading into 2026. Consequently, we now anticipate real GDP growth around 2.0% in 2026, with growth momentum easing from 2.0% y/y in Q4 2025 to 1.7% y/y in Q4 2026.

In light of upside risks to inflation and a hawkish “once burned, twice cautious” stance among most Fed officials, our baseline features only one 25bps rate cut in 2026, likely in December. It is entirely plausible that the Fed delivers no rate cuts this year, and there is a non-negligible chance that a rate hike — not a cut — could be the next policy move.