【Market Flash】Fed Holds Steady, M-Squared Provides Oil Price, Inflation, and Rate Path Outlook!

What we want you to know:
In March, the Federal Reserve’s FOMC kept the benchmark interest rate in the 3.50% to 3.75% range, maintaining the 2026 rate cut path on the dot plot. Amid the uncertain Middle East situation, members provided slightly higher economic, inflation, and productivity forecasts in the SEP, while financial analysts offered scenarios on oil prices, inflation expectations, and interest rate developments!

Key points of this article:

2. In this meeting, the committee approved 11:1 to keep the interest rate in the 3.50% to 3.75% range, with the statement adding high uncertainty risks from the Middle East.

3. The dot plot still shows a rate cut path of 1 basis point in 2026 and 2027, signaling the Fed’s stance remains on a rate cut trajectory.

4. The SEP slightly raised the 2026 economic growth forecast to 2.4% (from 2.3%), inflation and core inflation to 2.7% (from 2.4%) and 2.7% (from 2.5%), indicating members believe the impact of US-Iran conflict on inflation is short-term. Additionally, they revised up the US economic growth estimate, reflecting recent productivity gains.

5. During the press conference, Powell maintained a neutral, cautious stance, stating that the high uncertainty in the Middle East makes precise predictions difficult. The Fed will decide in the next six weeks based on evolving conditions, and when asked about rate hikes, he emphasized that although discussions occurred, it is not the baseline scenario.

1. Fed March Meeting Holds Steady, Focus on Middle East Uncertainty!

In this meeting, the Fed’s voting members approved 11:1 to keep the benchmark rate in the 3.50% to 3.75% range, with the statement maintaining that economic activity remains solid, and adding that the impact of the Middle East situation on the US economy is highly uncertain. This signals a cautious stance, awaiting further developments. Key points from the statement:

Economic and Inflation Outlook: Steady Economy, Watchful on Middle East Risks

The economic outlook remains largely unchanged from the previous statement, describing activity as solid. The description of the unemployment rate was updated from “showing signs of stabilization” to “little changed in recent months.” The paragraph on the dual mandate did not reintroduce concerns about increased downside risks to employment, indicating the Fed does not see further weakening in the labor market.

Regarding inflation, the Fed maintains that it remains somewhat elevated, and emphasizes the high uncertainty regarding the impact of Middle East tensions on US inflation.

Interest Rate Guidance: No Change in Path

The forward guidance on interest rates remains unchanged, retaining language about possible further rate cuts since September 2025, and reintroducing the phrase “more cautious assessment of the extent and timing” of future cuts (originally: the extent and timing). The message is that the Fed is ending its series of rate cuts but remains on a downward trajectory.

Monetary Policy Approach: Acting According to Future Inflation Trends

Eleven out of twelve members agreed to keep rates steady. Only Stephen I. Miran, nominated by Trump, supported a 25 basis point cut at this meeting (previously supported 50 basis points). Most members, like Powell, indicated they will act based on economic data after assessing the Middle East situation, adopting a cautious, data-dependent approach.

2. Dot Plot Maintains 2026 and 2027 Rate Cuts of 1 Basis Point Each

The market’s focus was on the Fed’s interest rate path. The latest March dot plot shows a more concentrated distribution for 2026, with 7 members supporting no change, 7 supporting a 25 basis point cut, 2 supporting a 50 basis point cut, and 3 supporting cuts greater than 50 basis points. The median remains at a 25 basis point cut, in the 3.25% to 3.50% range, though most members have lowered their expectations for the size of future cuts.

For 2027, the rate is expected to stay in the 3.00% to 3.25% range, with a 25 basis point cut forecast. The 2028 median remains at 3.00% to 3.25%, indicating an end to rate cuts. The long-term median rate was slightly raised to 3.125%, and the dot plot still shows an inverted yield curve, reflecting the view that the Middle East impact on inflation is short-term, with room for policy rate reductions as inflation eases.

Overall, the Fed expects 1 basis point cuts in 2026 and 2027, signaling a continued easing bias. Notably:

2. One member projects a rate hike in 2027, which was a key question during the press conference. Powell said discussions about rate hikes occurred but are not the baseline.

3. The long-term neutral rate was raised again to 3.125%, incorporating productivity growth estimates, which will influence economic growth and inflation.

Further details will be elaborated during the press conference.

3. Slight Upward Revision of US Economic and Inflation Forecasts, with a Focus on Productivity Gains!

The SEP again modestly raised the 2026 GDP forecast to 2.4% (from 2.3%), with the unemployment rate unchanged at 4.4%. Inflation projections were slightly increased to 2.7% for both total and core inflation (from 2.4% and 2.6%). This, combined with the rate cut of 25 basis points, suggests members see the war’s inflation impact as short-term, with room for rate cuts before 2026. The long-term economic growth estimate was raised to 2% (from 1.8%), and the neutral rate to 3.1% (from 3%), reflecting productivity improvements.

Forecasts for 2026–2028:

• Slight upward revisions in GDP growth: 2.4% (from 2.3%), 2.3% (from 2.0%), and 2.1% (from 1.9%). The long-term growth estimate is now 2.0% (from 1.8%).
• Unemployment rate forecasts remain roughly unchanged: 4.4%, 4.3%, and 4.2%.
• Slight increases in PCE inflation: 2.7% (from 2.4%), 2.2% (from 2.1%), and 2.0%.
• Slight increases in core PCE inflation: 2.7% (from 2.5%), 2.2%, and 2.0%.
• The interest rate path remains steady, with a gradual decline to around 3.4%–3.1%, and the long-term rate slightly raised to 3.1%.

4. Fed Continues Monthly Treasury Purchases to Support Market Liquidity

Following the October 2025 announcement ending balance sheet runoff and the December 2025 decision to buy short-term debt, the NY Fed has begun implementing Reserve Management Purchases (RMPs) of short-term Treasuries since December 12, 2025. Details and liquidity impacts:

Liquidity Impact as of March 2026:

The NY Fed plans to buy Treasuries with maturities under one year, and possibly up to three years if needed. The RMPs will be announced on the 9th business day of each month, with purchases expected to remain around $40 billion per month until tax season in April, to offset non-reserve liabilities.

The latest balance sheet shows US Treasuries holdings increased from $4.19 trillion to $4.35 trillion, with an average monthly increase of $43.5 billion from December 2025 to February 2026, preventing the balance sheet from shrinking further.

Liability structure indicates that, despite the TGA remaining high at around $937.6 billion, reserve balances have begun to rise again, recently surpassing $3 trillion, reflecting the expansion of the balance sheet due to short-term debt purchases. The Fed did not specify whether the $40 billion monthly purchases will continue after April, so ongoing monitoring is recommended as a key indicator of liquidity conditions during the rate pause.

Note: The purpose of the Fed’s short-term debt purchases is to maintain ample reserve levels, avoiding excessive short-term interest rate volatility. Controlling the policy rate’s upper and lower bounds is a key aspect of the Fed’s credibility. When members see risks to policy rate control, they tend to act decisively with monetary policy measures.

5. Powell’s Post-Meeting Press Conference Highlights

[Content not provided; likely a summary of Powell’s remarks emphasizing cautious outlook and data dependence.]

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