Markets expect no interest rate cut from the US Federal Reserve during the March FOMC meeting. However, all eyes will be on the US Fed chief Powell’s press conference.
The FOMC meeting is taking place over two days, March 17-18, with Powell announcing the decision on the rate cut on Wednesday, March 18, followed by the press conference. Currently, rates stand at a range of 3.5% to 3.75%.
So, what is holding back the US Fed from cutting rates in March? In reality, even before the US-Israel assault on Iran started on February 28, markets did not anticipate any rate in March.
The markets had anticipated at least two rate cuts before the war, but as it approaches its 17th day, their expectations have decreased to just one.
Why? Blame it on the oil. The US-Israel war on Iran has led to over 48% surge in oil prices since the war began. Brent crude, which was trading at $70 prior to the start of the war, is currently trading at about $104 on Tuesday.
Growing oil prices drive up the cost of almost everything, reduce corporate profit margins, and have a significant impact on the economy.
As was seen in earlier FOMC meetings, before the war, some members want to see steeper rate cuts in light of weakness in the labor market, while others are more worried about persistent inflationary pressures.
The Middle East war and the oil shock may have changed the equation completely for the Fed members.
That will get revealed in the Summary of Economy Projections and the dot plot to be released on March 18. In the wake of the Iran war, policymakers will present their quarterly economic estimates, including their expectations for inflation, economic growth, and other economic indicators.
“It’s likely that the Summary of Economy Projections will give a stagflationary signal as policymakers will likely revise up inflation forecasts and revise down the growth outlook. But an important nuance to it all is that the second half of 2026 should look very different than the first half. Investors must be patient in times like these,” says Jeffrey Roach, Chief Economist for LPL Financial.
Stickiness is already evident in inflation data even prior to the commencement of the Iran war. Fed’s preferred benchmark, the Personal Consumption Expenditures index, rose 2.8% year-over-year, with the core measure (excluding food and energy) increasing by 3.1%, in January.
Even the US economy is not growing as previously expected. A preliminary estimate for the U.S. economy’s growth in the fourth quarter has been revised downwards. The economy grew at an inflation-adjusted annual rate of 0.7%, significantly lower than the previously estimated 1.4%, and a sharp decline from 4.4% growth in the third quarter.
The US Fed is once more caught in a Catch-22 situation, whether to lower rates to boost the job market and the economy or to keep rates unchanged to fight inflation. “Investors and the Fed are in uncharted territory right now, taking their cues from crude oil and tanker traffic in the Strait of Hormuz,” says David Russell, Global Head of Market Strategy at TradeStation, an online brokerage firm.
Therefore, at the press conference, what Powell has to say about resurgent inflation amid tensions in the Middle East and Iran’s blockage at the Strait of Hormuz will be a keenly watched event. Powell’s chairmanship is set to expire in May; this press conference may be his second-to-last.
Next US Fed Rate Cut
With rates likely to remain unchanged in March, when can the markets see the next rate cut? That would largely depend on oil prices and the outcome of the Iran war.
Nigel Green, CEO, deVere Group, says, “July now looks like the earliest realistic point for the first cut, and even then, the easing cycle is likely to be gradual. Markets will continue to watch incoming inflation data closely in the coming months, alongside developments in energy markets and geopolitics.
Any sustained surge in oil prices could feed through into transportation, production costs and consumer prices, complicating the path toward lower inflation.
Inflation progress has slowed and energy prices have jumped. Those factors together mean policymakers at the Fed will be in no rush to cut rates any time soon.”
Market Trends Lower
Markets are on shaky ground and stocks, particularly in the financials and industrial sectors, have been badly hit. Dow has been hit much more than S&P 500 and the Nasdaq, but still the sentiments are expected to remain weak till the war ends or the oil supply through the Strait of Hormuz resumes.
“The large jump in oil prices is what is driving markets – just witness the peaks and valleys in equities, which have been moving inversely to the oil price, as the news flow changes – so if the war is limited in duration and supply disruptions are remediated, then equities will be able to resume rising and will effectively look though this conflict,” says Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
“On the other hand, if the war lasts a lot longer than a month and causes true supply destruction in the oil markets, then we could be in a different situation, one which will take much longer to recover from,” adds Zaccarelli.