Early morning sharp decline across the board! Major Fed announcement! Powell makes heavyweight statement!

The Federal Reserve Continues to Hold Steady

At 2 a.m. Beijing time on March 19, the Federal Reserve announced that the federal funds rate range would remain unchanged at 3.50%–3.75%, in line with market expectations. The policy statement mentioned that the impact of Middle East conflicts on the U.S. economy remains uncertain. According to the latest dot plot, Fed policymakers expect to cut interest rates once this year and again in 2027, but the specific timing remains unclear.

Following the announcement, Fed Chair Jerome Powell signaled a hawkish stance during his press conference. He stated that U.S. inflation remains stubborn, and with rising uncertainties about the outlook, the Fed will not cut rates unless there is progress in inflation. He also mentioned that some Fed officials favor reducing the number of future rate cuts.

Influenced by the hawkish signals and escalating Middle East tensions, U.S. stocks declined across the board. By the close, the Dow fell 1.63%, the S&P 500 dropped 1.36%, both hitting their lowest levels since November last year; the Nasdaq declined 1.46%. Major tech stocks all fell: Amazon down over 2%, Apple, Google, Microsoft, Meta, Broadcom, and Tesla all down more than 1%, Nvidia down 0.84%. Analysts warn that ongoing energy shocks could slow inflation and growth, creating a “dangerous combination” that will pose greater challenges for the Fed in balancing its responsibilities.

Federal Reserve Announces No Rate Cut

On March 18, Eastern Time, amid escalating tensions in the Middle East and soaring oil prices, the Federal Open Market Committee (FOMC) released its latest interest rate decision, maintaining the federal funds rate target at 3.50%–3.75%, in line with market expectations.

This marks the second consecutive FOMC meeting since the end of last year’s three rate cuts, where no rate changes were made.

The decision to pause rate hikes was not unanimous. The FOMC statement noted that out of 12 voting members, one, Federal Reserve Board Governor Stephen Miran, voted against the decision, advocating for a 25 basis point cut. This is the sixth consecutive FOMC meeting with dissenting votes, highlighting increasing internal divisions within the Fed.

Market expectations for the pause were already high. On the eve of the meeting, CME’s FedWatch tool indicated that traders priced in nearly a 99% probability of no rate hike.

The main difference from the previous meeting was the addition of a statement regarding Middle East tensions. The statement said that the Iran conflict that erupted three weeks ago has added uncertainty. The conflict and its impact on the Strait of Hormuz have disrupted global oil markets and could keep inflation above the Fed’s 2% target. It stated, “The development of the Middle East situation remains uncertain in its economic impact.”

The dot plot released after the meeting showed that most Fed officials expect to cut rates once this year and again in 2027, though the exact timing remains uncertain. Of the 19 FOMC members, 7 do not expect a rate cut this year, an increase of one from December. The median projection indicates further rate cuts in 2027, with the federal funds rate stabilizing around 3.1% in the long term.

While the Fed’s economic outlook remains relatively unchanged, it slightly raised its forecasts for 2026 economic growth and inflation.

In its latest economic projections, Fed officials expect U.S. GDP to grow 2.4% this year, slightly higher than the December forecast of 2.3%. For 2027, growth is expected at 2.3%, up 0.3 percentage points from previous estimates.

Powell Signals a Hawkish Stance

Since the rate hike pause was fully priced in by the market, attention turned to Powell’s latest remarks.

At the press conference held at 2:30 a.m. Beijing time, Powell warned that U.S. inflation remains stubborn, and rising uncertainties—from Middle East tensions to tariff disruptions—are disrupting the inflation slowdown.

He clearly stated that he would not consider cutting rates until there is further improvement in inflation; meanwhile, the committee has begun discussing “the possibility of rate hikes next,” though this is not the baseline scenario for most officials.

Powell opened by saying that the U.S. economy is expanding, inflation remains slightly high, consumer spending is resilient, but housing activity is weak. He believes current policy is appropriate “to help achieve our goals.”

He reiterated that demand in the labor market has cooled significantly, but the unemployment rate has remained relatively stable since last summer. Past rate cuts should have helped stabilize the labor market.

During the Q&A, Powell added that there are indeed downside risks to the labor market, but several employment indicators show some stability.

He specifically pointed out that the impact of Middle East developments remains uncertain, and the Fed will closely monitor various risks. It is too early to judge the scope and duration of their economic impact.

Regarding U.S. inflation, Powell said recent inflation expectations have risen, energy price increases will push overall inflation higher, and some oil shocks will be reflected in core inflation.

In response to questions, Powell acknowledged that inflation well above 2% is concerning. Many participants mentioned rising short-term inflation expectations, and all agreed to keep a very close watch on inflation expectations.

Powell noted that the dot plot of interest rate projections is not a preset path; future decisions will be made at each meeting. Some officials favor reducing the number of future rate cuts.

He also said that slow progress on tariffs affects inflation forecasts and may require more time. Prolonged high oil prices could dampen consumption, and “we really don’t know what impact rising energy prices will have.”

He added that oil shocks can be offset by U.S. energy production; if oil companies believe the rise will persist, they will increase output.

Powell believes the current policy stance is appropriate, sitting at the edge of tightening and easing. The policy rate is in the higher end of the neutral zone, or slightly restrictive.

He stated that if, by the end of his term as Fed chair, his successor has not been confirmed, he will continue to serve as “acting chair” until a formal appointment is made.

(Source: Securities Times)