A Hawkish Hold in the Face of Uncertainty

The Federal Reserve held its policy rate steady at 3.5-3.75% following its March 18 meeting. The new dot plot of fed funds rate forecasts was unchanged from December’s, with a median expectation of one rate cut in 2026 and one in 2027. However, seven of the 19 participants did not see the need for a cut this year as tariff and energy shocks pressure the central bank’s dual mandate from both sides.¹

The median forecast for both headline and core PCE inflation rose, while labor market projections were basically unchanged through the forecast horizon. Fed Chair Powell indicated it’s still too early to judge the potential impact of the war on inflation and the labor market, as it will depend largely on the severity and duration of the oil price shock. He instead spent most of his press conference discussing the impact of tariffs, which the Fed staff estimates is adding 0.5-0.75% to 3% core personal consumption expenditure (PCE) inflation, though he expects this to fade once lapped this summer.²

The committee increased its forecasts for real GDP growth through 2028. It also bumped up its estimate of potential economic growth to 2%, which Powell attributed to improved productivity growth but noted it was too early to attribute it to artificial intelligence (AI). The median estimate of the longer run neutral policy rate increased to 3.1% from 3.0%.³

In response to Powell’s remarks, the market shifted its expectation of the next interest rate cut to mid-2027 from December 2026. This reaction seems excessive to me. A short-lived oil shock could potentially open up space for a cut in the fourth quarter under the next chair, while a more severe shock—especially one that tightened financial conditions—could actually lead to more rate cuts if accompanied by a weaker labor market.⁴