Little change at the Fed, yet
The committee noted risks to both sides of its dual mandate, with downside risks to employment weighing against rising price pressures, the latter stemming in part from conflict in the Middle East. A hawkish overall tone from Chair Powell in his penultimate press conference was arguably the main tak
The FOMC left the range of the federal funds rate unchanged at 3.50-3.75% as expected following the conclusion of their March meeting, keeping guidance on the likely rate path similarly untouched.
The committee noted risks to both sides of its dual mandate, with downside risks to employment weighing against rising price pressures, the latter stemming in part from conflict in the Middle East. A hawkish overall tone from Chair Powell in his penultimate press conference was arguably the main takeaway for traders, leaving the dollar stronger post-event.
Looking first at the policy statement in a little more detail, this saw minimal alteration relative to January, noting only that “The implications of developments in the Middle East for the U.S. economy are uncertain”.
Fed Governor Stephen Miran again dissented in favour of a 25bp cut, but all other committee members voted to leave rates unchanged, matching consensus predictions.
Unsurprisingly, the Summary of Economic projections saw the PCE forecast for 2026 raised to 2.7%, up from 2.4% in December, with core also increased from 2.5% to 2.7%. This accounts for the likely effect of the energy shock seen to date, though we anticipate another upgrade in June if fighting in the Middle East drags on. Unemployment forecasts were little changed, with the economy still seen to be in a low-hiring, low-firing equilibrium. Admittedly, we had not anticipated an upgrade to the FOMC’s growth projections.
But GDP expectations were revised up for 2026 and 2027, while the median longer-run growth forecast was upped to 2.0% from 1.8%. Still, the totality of the forecast revisions proved modest, given recent developments.
That said, we also put little stock in this latest set of SEPs, a point remarked on by Chair Powell too. With the impact of the conflict in the Middle East still highly uncertain, these numbers are more guesses than anything else. More interesting to us was Powell’s assessment of the balance of risks, and we are inclined to place some weight on two factors. First is the focus he placed on events in the Middle East, the impact on oil, and how this translates into inflation. While the Chair remained non-committal, he did not suggest a clear preference to look through these latest shocks, arguably leaning hawkish at the margin. That sentiment was reinforced by Powell’s tone on domestic inflation dynamics, with the Chair hinting at disappointment that goods inflation specifically was proving stickier than anticipated.
All told then, traders were left with a broadly unchanged set of written guidance, and a press conference that lent hawkish at the margin.
While the bar to hiking rates is clearly high, the bar for cutting seems to have risen somewhat as well. That argues for a modestly shallower rate path being priced in, with markets duly accommodating. For the dollar, this has proven a boon post announcement, with the DXY adding several tenths as traders digested Chair Powell’s comments.