The Federal Reserve is expected to stand pat tonight as a stagflation warning sounds—how will Powell perform his "balancing act"?
At 2:00 a.m. Beijing time on the 19th, the Federal Reserve will announce its rate decision. It is highly likely to choose "to stand pat" in March, remaining on the sidelines between the inflation risk lifted by the Iran war and weakening employment data. The policy tendency is towards "continuing the pause or cutting rates later," rather than raising rates again. The market is keeping a close eye on the Summary of Economic Projections (SEP) and Chairman Powell's wording at the press conference.
The current situation puts the Federal Reserve in a dilemma. Soaring energy prices are putting further upward pressure on inflation, which is already above the 2% target, and a sharp drop of 92,000 in February’s nonfarm payrolls reignited market concerns over stagflation, forcing the committee to seek balance between its dual mandate.
The market focus has now shifted from "when to cut rates" to "whether to cut". Morgan Stanley believes that due to weak employment and the Fed seeing through the one-off impact of oil prices on inflation, monetary policy risks are clearly asymmetric: rising inflation will delay rate cuts rather than trigger rate hikes, but rate cuts will be chosen if employment weakens.
Recently, dovish signals from several officials have strengthened. Both Goldman Sachs and Morgan Stanley expect the dissenting votes at this meeting to increase from two in January to three. Meanwhile, energy prices have prompted the market to reprice: the expected number of rate cuts this year has dropped from two to one, and the timing of the first cut has been pushed back to the fourth quarter.
Standing Pat Is Almost Certain, Focus Shifts to Powell’s Wording
The Fed will keep the federal funds target rate range unchanged at 3.50% to 3.75%, with virtually no disagreement among major institutions. Morgan Stanley, Goldman Sachs, and Bank of America all expect the same outcome in their latest reports, with differences only on the pace of future rate cuts.
Morgan Stanley maintains its forecast fortwo rate cuts this year (25bps each) in June and September. The bank believes that due to weak employment in February and the Fed seeing through the one-off impact of oil prices on inflation, monetary policy risks are manifestly asymmetric:
With inflation above target, rising oil prices are more likely to cause the Fed to delay rate cuts—or increase the magnitude of rate cuts—rather than trigger a rate hike.
Bank of America points out that given the high rise in geopolitical uncertainty, a clear forward guidance is not expected at this meeting. The bank’s Fed watchers wrote:
"Powell’s ability to guide the market depends on how much the market sees his comments as representing the committee’s consensus rather than just his own. Even aside from this constraint, Powell faces many challenges this time."
Since Powell’s term expires in May, the market is expected to be extra cautious interpreting his statements.
Russell Investments Senior Investment Strategist BeiChen Lin said:
"The outcome of this meeting is nearly certain—to keep rates unchanged. But any signals Powell gives about the future interest rate path will be critical. Overall, the fundamentals of the US economy remain solid, which suggests the threshold for further rate cuts could be rather high."
Iran War plus Weak Employment, Stagflation Concerns Test Dual Mandate
The macro background of this rate meeting is unusually complex, with the Fed facing diametrically opposite pressure signals.
On inflation, since the outbreak of the Iran war, prices for energy, metals and agricultural products have all climbed. The Fed’s favored inflation indicator, core PCE, is up 3.1% year-on-year, and monthly rose 0.4% with almost no substantial pullback recently, significantly diverging from the 2% policy target.
On the labor market side, February’s nonfarm payrolls dropped 92,000, disappointing previous expectations of market stabilization and will spark sharp questions about stagflation at the post-meeting press conference. Initial jobless claims data has been stable and JOLTS data has improved somewhat, but overall conditions remain weak.
Fed Governor Waller explicitly said the current rise in energy prices is unlikely to cause sustained inflation, which is something policymakers may need to temporarily set aside for now—but he remains highly focused on the labor market, especially noting the large-scale impact of AI on jobs.
Former Fed Vice Chairman Roger Ferguson said in a CNBC interview that he is more worried about inflation risks: "The Fed has been deviating from its 2% goal for years, and ultimately, the credibility of this target will be questioned if this continues."
Dot Plot Likely to See Limited Changes, SEP Key Focus on Inflation and Unemployment Forecast
The SEP will be released after the meeting, with institutions expecting little overall change, though directional adjustments are detectable.
Goldman Sachs expects the central tendency in the dot plot will basically remain unchanged, with one rate cut each in 2026 and 2027. The bank believes some members may bring forward rate cut expectations due to new labor market data, while others may push them back due to inflation risks, roughly offsetting each other.
Specific changes in various forecasts:
Goldman Sachs expects the overall 2026 inflation forecast to be revised up about 0.6 percentage points to 3.0%, with core inflation up about 0.2 points to 2.7%; GDP growth forecast revised down about 0.2 points to 2.1%; unemployment forecast moved up about 0.2 points to 4.6%. These revisions roughly offset each other in terms of the rate forecast.
Morgan Stanley believes the Fed will stick to its usual practice of "seeing through" the impact of oil prices on overall inflation and maintain the baseline forecast of one rate cut each in 2026 and 2027. It expects the median federal funds rate in 2026 will be in the 3.25%–3.50% range, and the 2027 and longer-term neutral range will be 3.00%–3.25%, about the same as the December 2023 SEP.
Morgan Stanley Chief Global Strategist David Kelly wrote: "Judging from public statements by Fed officials, they may emphasize that Middle East conflict adds more uncertainty to inflation and employment outlook. However, their forecasts may not differ much from three months ago."
It should be noted that the uncertainty of war-time economic forecasts is very high, and most economic effects depend on the duration of the conflict. Trump has hinted the conflict may end in a few weeks, but this is difficult to verify.
Doves’ Support for Rate Cuts Likely to Expand to Three Votes, Marginal Increase in Dovish Power
At the January meeting, Miran and Waller voted for a 25bps cut, becoming two dissenting members. At this meeting, both Goldman Sachs and Morgan Stanley expect the number of votes supporting a rate cut to expand to three.
Bowman clearly stated on March 6 that the labor market needs more monetary policy support, insisting on a cumulative 75bps cut this year, and recent comments are obviously dovish.
Waller previously said that if January’s strong job momentum doesn’t continue in February, he will support a rate cut—February’s sharp drop in nonfarm payrolls confirms this judgment.
Miran is more aggressive, publicly calling for four cuts totaling 100bps this year, and for rapid execution.
Still, doves remain a minority in the committee. Other governors and the group of 2026 voting members are neutral or hawkish. Hawkish members believe the current policy rate is at or near neutral and are cautious about further cuts. No member is currently advocating for rate hikes.
Successor Dispute Remains Unresolved, New Policy Direction Still Uncertain
Powell’s term as chair expires in May, making this his second-to-last rate meeting as chair. He may continue as a board member until his Fed governor term ends in 2028, but it is customary not to comment on related issues.
Trump nominated former Fed governor Warsh to succeed Powell, but Senate confirmation progress is being blocked. Thom Tillis says confirmation will be halted until DOJ completes its investigation into Powell; if confirmed, Warsh is expected to replace dovish governor Miran on the board; if Powell leaves the Fed entirely, it will create an extra board vacancy.
According to Goldman Sachs, Warsh's dovish tendency partly stems from his confidence in disinflation, which differs little from Powell's position. However, the challenge for a new chairman is: Powell’s cohesion in the face of unclear data and committee disagreement is not something the next chair can instantly inherit.
On balance sheet policy, Warsh’s position is much more divergent from other officials. His proposal calls for a substantial reduction in the Fed’s balance sheet, pushing duration risk back into the market and creating upward pressure on long-term rates, while offsetting via federal fund rate cuts so overall financial conditions remain largely unchanged.
According to a Reuters survey, about two-thirds of economists expect the Fed to resume rate cuts in June—after Warsh takes over.
Market Impact: Rates, FX, Stocks and Credit All Worth Watching
Rates Market: Goldman Sachs’ Brian Bingham points out that the inflation shock triggered by the Iran war has spread to the dollar short end, SFRZ6 moved more than 50bps, and year-end terminal rate pricing hit a new low. The probability of a rate hike at Warsh’s first meeting (June) is priced almost 10%, which he believes is extremely low and suggests shorting tail risks of rate hikes.
FX Market: Goldman Sachs’ Lexi Kanter says geopolitics is driving markets, with focus switching between inflation shocks and recession risks—if the Fed stresses inflation, the dollar, Australian dollar, Canadian dollar and real will benefit; if recession worries dominate, the yen may be the strongest. G10 trader Mark Salib is long USD now but has trimmed positions.
Equities Market: Goldman Sachs’ Vickie Chang says direct impact of this FOMC meeting is limited, key lies in unfolding uncertainty. Market risk leans toward lower rates—if hawkish pricing reverses, falling rates will support equities. SPX straddles pricing for FOMC day is about 85bps, but if hawkish dot plot combines with sustained Iran tensions, equities face downside risk.
Credit Market: Goldman Sachs’ Usman Omer notes credit spreads widened markedly on macro weakness, stagflation risks, Big Tech’s mass bond issuance, and worries over private credit, with CDX high yield underperforming investment grade. He believes wider spreads may become the new normal, and if the growth/inflation trade-off worsens, credit risk premiums will be under further pressure.
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