Federal Reserve Decision Preview: Iran War + Inflation Explosion, Rate Cut Ruled Out This Week, Focus on 4 Key Points

Reuters Finance App News — Amid escalating conflicts between the Middle East, the U.S., Israel, and Iran, rising oil prices, increasing inflation expectations, mixed signals in the labor market, and uncertain prospects for tariff policies, the Federal Reserve will announce its interest rate decision at 2 a.m. Beijing time this Thursday.

The market has priced in near-zero probability of a rate cut, with futures markets indicating that the Fed is unlikely to consider easing until September or even October at the earliest, and only once throughout the year.

Fed Chair Jerome Powell and his colleagues face the challenge of balancing multiple conflicting forces, with a very high likelihood of maintaining the federal funds rate in the 3.50%-3.75% range. Updates to economic and interest rate forecasts are also not expected to show significant changes.

Market Expectations: Rates Hold Steady This Week, Short-term Easing Hope Essentially Gone

According to the CME Group’s FedWatch Tool, the market’s probability of a rate cut this week has fallen to nearly zero.

Before the outbreak of war, traders expected a 25 basis point cut in June, another in September, and possibly a third depending on data. However, the Iran conflict and its impact on oil prices and inflation have completely changed market expectations. Currently, the market is only pricing in one rate cut by the end of the year, with timing pushed back to September or October.

BeiChen Lin, Senior Investment Strategist at Russell Investments, said, “The Fed itself has almost certainly decided to keep rates unchanged at the March meeting,” but any hints from Powell about future rate paths will be crucial. She added, “Overall, the U.S. economy remains resilient, which means the threshold for further rate cuts could be quite high.”

Before the war, markets expected the Fed to cut rates in June and at least once more before the end of the year. But the Iran conflict and its effects on oil prices and inflation have prompted a reassessment of the Fed’s path. While Fed officials typically tend to ignore short-term oil price shocks, the current energy crisis is unprecedented, and inflation expectations have risen sharply, making it difficult for the Fed to turn a blind eye.

Powell’s statements will be closely watched, with the countdown to his term adding uncertainty

This will be Powell’s second-to-last monetary policy meeting as Fed Chair, and markets are especially sensitive to his comments. He needs to balance statements on inflation, employment, economic growth, and policy outlooks in his post-meeting remarks.

The U.S. Bank’s Fed Watch team noted in a report, “A rate cut in April is almost entirely ruled out,” and Powell’s ability to guide markets will depend on whether his comments are seen as representing the committee’s consensus rather than his personal view. They added, “Even without that restriction, Powell’s job remains very challenging.”

Former Fed Vice Chair Roger Ferguson said he expects the committee’s post-meeting statement to remain “cautious” on inflation, unemployment, economic growth, and policy outlooks. He noted, “Everyone is watching to see what they say, if anything, about the future and how they view the risk balance changing.”

In weighing employment and inflation, Ferguson leans more toward concern about prices. “I’m more worried about inflation rising. The Fed has missed its 2% target for years,” he said. “Eventually, people will start questioning whether the Fed is truly aiming for 2%, so that worries me more.”

The dot plot may remain cautious, with markets focusing on the Fed’s assessment of conflict impacts

Investors will look closely at the Summary of Economic Projections (SEP) and the much-watched “dot plot” for insights into the committee’s thinking. The December dot plot showed only one more 25 basis point cut this year, with the median “neutral rate” remaining at 3%. Given the tense Iran situation, markets expect no major changes in the March dot plot.

David Kelly, Chief Global Strategist at JPMorgan Asset Management, said, “From their communication, they’re likely to emphasize that the Middle East conflict adds further uncertainty to inflation and employment outlooks, but their forecasts may be surprisingly similar to those from three months ago.”

Political shadows over the Fed, Trump continues to pressure for rate cuts

The Fed remains under political pressure. President Trump has publicly urged the Fed, especially Powell, to cut rates sharply for years.

On Monday (March 16), Trump again criticized Powell in the media, calling for a special meeting to cut rates. He said, “What better time to cut rates? Even a third grader knows that.”

However, Trump’s own Justice Department is blocking the nomination of Powell’s successor, Kevin Warsh. Prosecutor Jeanine Pirro in D.C. has ongoing criminal investigations into the Fed headquarters renovation initiated by Powell, and North Carolina Republican Senator Thom Tillis has promised to block Warsh’s nomination in the Senate Banking Committee until the investigation concludes. This suggests Powell may remain in his position until the end of his term in May.

Overall, the energy shock and rising inflation expectations triggered by the Iran conflict are forcing the Fed to adopt a cautious stance at this week’s meeting. Market hopes for short-term rate cuts are essentially gone, and the Fed must carefully balance inflation risks against economic growth slowdown.

Powell’s final few statements as Chair will significantly influence market expectations. If the Fed maintains a hawkish stance and lowers expectations for rate cuts, the dollar and U.S. Treasury yields could strengthen further, while stocks and growth equities may face increased pressure.

Investors should closely monitor the Wednesday FOMC statement, the updated dot plot, and Powell’s press conference to gauge the true policy path.

In the short term, the likelihood of the Fed holding rates steady is very high, and the dollar’s relative strength may persist, while the prolonged Iran conflict continues to inject high uncertainty into global financial markets.

(Edited by: Wang Zhiqiang HF013)