Fed Update | March 2026 FOMC Reaction

2 days ago
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The Fed will remain on hold until they are confident that tariff inflation has passed through and they have had time to assess the uncertain evolution of war in the Middle East. With the broader economy still relatively solid and unemployment steady, the need for greater progress on inflation and clarity on the outlook will push any rate cuts out until December at the earliest, barring any unforeseen deterioration in labor markets. Conversely, an unexpected de-anchoring of inflation expectations could even bring a pivot toward hikes, instead. Chair Powell will remain at the Fed until DOJ investigations are unambiguously resolved and potentially longer to safeguard the US central bank's independence - ensuring his influence endures beyond his tenure as Chair.

18 MAR 2026

EDWARD VON DER SCHMIDT

Observations

The FOMC statement brought few changes with unemployment "little changed in recent months" as the economy continued "expanding at a solid pace". Inflation remains "somewhat elevated" and outlook uncertainty "remains elevated". Notably, the Committee added language about the "implications of developments in the Middle East", which are "uncertain".

Minimal forward guidance preserves maximum flexibility and is appropriate to the Fed's lack of policy conviction, other than being in a good place to "[consider] the extent and timing of additional adjustments" to policy rates. In other words, when in doubt, do nothing: the 3.50-3.75% target range is here to stay.

The updated March Summary of Economic Projections (SEP) included slightly higher GDP forecasts and a larger markup in 2026 inflation, but longer-term estimates deviated minimally from December. FOMC participants appear to be looking through oil-shock-related price effects as a base case while conceding the possibility of volatile near-term inflation.

Even though median fed funds projections were mostly unchanged, 14 of 19 participants now expect one 25bp cut (7) or no cuts at all (7) in 2026. The longer run median ticked up to 3.125%, only 50bp below today's midpoint and suggesting limited scope for easing if rates are intended to stay neutral. On balance, inflation risks have garnered more attention than curiously stable labor markets with virtually no net job creation. Almost everyone at the Fed sees inflation risks to the upside.

The Chair's prepared remarks touched on familiar topics including coincident declines in labor demand and supply, the latter largely owing to sharp reductions in immigration. While concerning for employment health, these structural changes have kept unemployment steady and are out of the Fed's hands. While it is "too soon to know the scope and duration of the potential effects on the economy" stemming from the war with Iran, longer-term inflation expectations have kept consistent with the 2% inflation objectives. The Fed will watch closely to see that this remains so.

The press conference made clear that the Fed's principle focus is still on tariff passthrough effects, which are contributing 0.50-0.75pp to core inflation (~3%) and may run their course by the fall. In the context of years of above-target inflation, the Committee is seeking a return to trend inflation in core goods (near zero) before they will be comfortable that tariff persistence has subsided. They "haven't seen the progress that [they've) hoped for" on inflation. Powell put the policy test simply: "if we don't see that progress then you won't see the rate cut".

Although rate hikes were discussed by "several" participants, the "vast majority" did not see higher rates in their baseline for the Fed's next move, i.e., the FOMC's easing bias is intact. For now, current rates are at the "borderline between restrictive and not", which, to Chair Powell, "feels like the right place to be".

Calling for humility about forecast uncertainty, Powell did not opine at length about risks from the Middle East without knowing the scope and duration of the war and its effects on the economy. Powell also pushed back on the hyperbole of "stagflation", a term applied to 1970s high unemployment and high inflation (aka "misery") and nothing like present conditions.
Employment ratios, core goods inflation, and longer-term inflation expectations are the critical indicators with oil-shock effects assumed to be one-off until they aren't.

With his tenure as Chair set to elapse on May 15, Powell clarified that he will serve as Chair pro tempore until his successor is confirmed. Given that Senator Tillis is holding back Kevin Warsh's confirmation, this would appear unlikely before all potential DOJ investigations and prosecutions are unequivocally resolved; Powell committed to remaining at the Fed as long as these proceedings are open.

Powell's term as Governor runs through 2028 and he has not committed to stepping down early, which would be consistent with precedent for departing chairs. His choice of whether to stay will be "based on what's best for the institution and the people I serve". Given overt threats to the central bank's independence, we believe Powell sticks around.

For meeting information, refer to the Federal Reserve's website: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm