– Participants Project one 25 BP Rate Cut to 3.25-3.50% By End Of 2026
– Gov. Miran Only Dissent; Favored 25 BP Rate Cut
– FOMC: Economic ‘Implications of Developments in Middle East…Uncertain’
– Participants Revise ‘Longer Run” (Neutral) Funds Rate From 3.0% to 3.1%
– Powell: Must ‘Wait and See’ War Impact; Balance Upside and Downside Risks
– GDP Forecast at 2.4% Q4/Q4 in 2026; Unemployment Forecast at 4.4% in Q4
– PCE Inflation Forecast Higher 2.7% Q4/Q4 in 2026; Core PCE Forecast At 2.7%
By Steven K. Beckner
(MaceNews) – Faced with increasingly complex economic and financial crosscurrents, a divided Federal Reserve monetary policy group voted Wednesday to leave short-term interest rates unchanged in what Fed Chairman Jerome Powell described as a “moderately restrictive” posture.
The Fed’s policymaking Federal Open Market Committee, which had to weigh the “stagflationary” impact of the war against Iran, left the federal funds rate in a target range of 3.5% to 3.75%, where that policy rate has been since December.
Fed Governor Stephen Miran dissented in favor of a 25 basis point rate cut.
The 19 FOMC participants projected a single 25 basis point rate reduction by the end of the year, as they did in December, but there was a wide range of projections, and Powell noted there was “meaningful movement” toward less easing over the next few years.
After repeating that “uncertainty about the economic outlook remains elevated,” the FOMC policy statement added a new assertion: “The implications of developments in the Middle East for the U.S. economy are uncertain.”
Powell echoed that sense of great uncertainty about the economic impact of the war and related oil price spike, saying repeatedly that he and his colleagues will just have to “wait and see” before considering “the extent and timing of additional adjustments” to the funds rate.
Powell, who said he is prepared to stay on as Chairman until his nominated successor Kevin Warsh is confirmed, said the oil price spike is likely to put both upward pressure on prices and downward pressure on economic growth and employment, but said the FOMC’s current policy stance is “appropriate” to cope with the balance of risks.
Before the United States, in cooperation with ally Israel, launched an all-out attack on Iran to destroy its nuclear and ballistic missile capabilities on Feb. 28, the U.S. economy was seen as expanding “solidly,” but with mixed labor market conditions and lingering inflation.
Since the war began, the economic outlook has become much more uncertain, as the FOMC acknowledged in its policy statement. Soaring energy costs have imparted additional upward pressure on prices, while also exerting potentially contractionary influences on demand, greatly complicating Fed forecasting.
And, of course, the war’s outcome and the persistence of high oil prices are highly unpredictable. President Trump has said the war will soon be over, but it is difficult for Fed watchers and others to have confidence in that.
Given those daunting circumstances, an already hesitant FOMC majority was reluctant to take any new rate action.
After cutting the funds rate by 75 basis points in the final three meetings of 2025 and 175 basis points since September 2024, the FOMC left the funds rate unchanged in a target range of 3.50-3.75% (a median 3.6%) for the second straight meeting.
And there was no sense from Powell or his fellow policymakers that the FOMC will end the pause in rate “normalization” anytime soon.
In their revised Summary of Economic Projections, the 19 FOMC participants projected another 25 basis points of monetary easing will be done by the end of 2026, taking the funds rate down to a target range of 3.25% to 3.50% (a median 3.4%) — the same as in the Dec. 10 SEP.
By the end of 2027, the funds rate is projected to fall to a range of 3.0% to 3.25% (a median 3.1%.), and it is projected to stay at 3.1% through 2028. These projections were also the same as in December.
Once again, the projections reflect divided viewpoints. Projections for 2026 ranged from 3.1% to 3.6%, but as Powell noted, there were fewer votes for deeper rate cuts.
Given the high degree of uncertainty, Powell joshed that this might have been a good time to skip the SEP exercise.
FOMC participants revised up their estimate of the “longer run” or “neutral” funds rate from 3.0% to 3.1%, while at the same time revising up their estimate of the longer run GDP growth rate from 1.8% to 2.0%. Powell attributed the upward revisions to faster productivity growth.
The new funds rate “dots” were accompanied by revised economic forecasts.
The officials now expect that PCE inflation will end 2026 at 2.7% — seven tenths above target and three tenths higher than forecast in December. Core PCE inflation is also expected to close out next year at 2.7% — up from 2.5%.
FOMC participants modestly raised their 2026 GDP growth forecast from 2.3% to 2.4% — four tenths higher than an upwardly revised 2.0% estimate of the “longer run” or potential growth rate. The unemployment rate is forecast to be 4.4% in the fourth quarter, the same as in the December SEP.
“The net of it, of the oil shock, will still be some downward pressure on spending and employment and upward pressure on inflation,” he said.
The combination of upside risks to inflation and downside risks to employment put the Fed in a tough spot, Powell acknowledged.
One one hand, “we haven’t seen .. the progress that we hoped for on core goods and on tariffs and on the rest of it…,” he said. “For whatever reason people did write up their inflation forecast, that would certainly be tied to the events in the Middle East and price of oil. It is also a reflection of this slow progress we have seen on tariffs, which we believe we will see.”
When the “one-time” impact of tariffs on inflation will dissipate “is a question of how long it takes for them to get all the way through the economy,” Powell said. “It just takes time.”
On the other hand, Powell said the Fed has to “watch carefully” labor market conditions in wake of a sharp drop in February payrolls.
There are “a number of indicators that suggest a degree of stability” in labor markets, he said, but “the thing that a good number of people on the committee are concerned about, is just the very low level of job creation. If you adjust what has been the trend job creation over the past six months, if you adjust that for what our staff thinks is the overstatement due to over counting, effectively there is zero net job creation in the private sector.”
Powell said that could be “what the economy needs in terms of dealing with very low nonexistent growth in the labor force,” he said, but added, “it does have a feel of downside risk. And it is not kind of a really comfortable balance…(I)t is something we’re watching carefully.”
Given what he called the “tension” between the Fed’s mandated goals, Powell said the FOMC must “balance the risks.”
For now, he said “we think it is important to keep policy mildly restrictive or close to that — not too restrictive because of the weakness in the downside risk of the labor market.”
“We’re balancing the two goals in a situation where the risks to the labor market or downside, which would call for lower rates and the risks to inflation are to the upside or higher rates, not cutting,” Powell went on. “We’re in a difficulty situation…..We feel where we are now is on the higher borderline of restrictive versus not restrictive, we feel-like that is the right place to be.”
Currently, he said, the funds rate is in “a range of plausible estimates of neutral.”
Oil hit a high of $119 per barrel as markets priced in risk of a shutdown of oil flows through the Strait of Hormuz. By the eve of the FOMC meeting, it had fallen below $100 per barrel but was fluctuating wildly, turning back above $100 Wednesday morning. Gasoline pump prices have risen roughly $1 per gallon.
In monetary theory, an oil price shock can only cause generalized inflation if the central bank accommodates it through expansionary monetary policy – that is by holding interest rates low and permitting excessive growth of money and credit. If the central bank does not do that, rising oil and energy prices theoretically just cause a relative price shift: other prices tend to fall relative to energy as higher energy costs force households to spend less on other things, leading to weaker economic activity, if not outright recession. Former Richmond Fed President Al Broaddus made this point when past Middle East crises drove up energy costs.
Asked, therefore, whether the Fed should “look through” the spike in energy costs, Powell responded, “Of course, it is standard learning that you look through energy shocks, but that has always been dependent on remaining inflation anchors.”
Noting that core PCE inflation has been rising a percentage pint above the Fed’s 2% target, he said the oil price shock has to be considered in “the broader context of inflation above target. We have to keep all of those thing in mind.”
Powell reiterated that the Fed has been hoping for and expecting “progress on inflation through a reduction in goods inflation as the one-time effects on prices of tariffs go through the system and the economy.”
“The question of whether we look through the energy inflation doesn’t arise until we have checked that box,” he said.
Powell denied that the U.S. economy is suffering “stagflation,” saying that is a term he reserves for periods like the 1970s.
Nevertheless, in advance of the FOMC meeting, financial markets have lately gotten a mild whiff of what many are calling “stagflation.”
Last Friday, the Commerce Department reported that the Fed’s preferred inflation gauge, the core price index for personal consumption expenditures (PCE) was up 0.4% in January or 3.1% from a year earlier – more than a percentage point above the Fed’s target. Previously, the Labor Department reported that the core consumer price index, which usually runs faster than the PCE, increased 0.3% in February 2.5% year-over-year.
The FOMC got more bad news on inflation on the second day of its meeting when the Labor Department reported that the producer price index jumped 0.7% in February, twice as much as expected, or 3.4% from a year ago. The core PPI was up an alarming 3.9% year-over-year
On the employment side of the dual mandate, the same department had previously reported that non-farm payrolls unexpectedly plunged by 92,000 in February, and it revised prior months’ payrolls sharply lower. The unemployment rate ticked up from 4.3% to 4.4%.
These dismal readings, none of which reflect much, if any, of the war’s impact, seem to bely assertions by some Fed officials that economic risks had become “evenly balanced.” Powell stopped short of saying that after the last FOMC meeting, but did say upside risks to inflation and downside risks to employment had both “diminished.”
Economic activity has also taken a hit. After growing 4.4% in the third quarter, real gross domestic product grew just 0.7% in fourth quarter, according to the Commerce Department, as the 43-day government shutdown offset healthy consumer spending. Despite the war, the Atlanta Fed revised up its estimated of first quarter GDP growth from 2.1% to 2.7% last Thursday — considerably faster than the FOMC’s 1.8% longer run estimate of the economy’s non-inflationary growth potential.
How the war and related oil spike will affect the economy going forward is something Powell was unable, or at least unwilling, to predict, beyond saying that the economy has proven remarkably resilient through a series of shocks over the past decade..
“Like everybody else, we have to wait and see what happens,” he said. “It will come down to how long the current situation lasts, and then what are the effects on prices and how consumers react. That kind of thing. I really wouldn’t speculate.”
“There is not a lot to do other than watch and see,” Powell added.
The Fed chief, whose term expires May 15, was similarly reticent when asked what the FOMC will do with rates at the next meeting.
“We will have to wait and see,” he replied. “I mean, you know, we always say we will learn more by the next meeting and usually we do. In this case, we will learn a lot. We will learn six weeks to the day until the next meeting….”
“It is going to be very important for the way the economy looks and the way the outlook evolves with what happens in the Middle East,” he continued. “That will be a big factor.
We’ll know that then. I don’t know how it will impact our thinking. I don’t.”
As for the option of raising rates, Powell said, “The possibility that our next move might be an increase did come up at the meeting as it did the last meeting. The vast majority of participants don’t see that as their base case.”
Powell said he intends to stay at the Fed until a Justice Department investigation of alleged cost overruns on the central bank’s headquarters renovation is “well and truly over with.” And he said he “If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed.”
As for whether he will stay on the Board as a regular Governor after his term as Chairman expires, he said, “I have not made that decision yet. I will make that decision based on what I think is best for the institution and for the people we serve. That is what the law calls for.”