Federal Reserve Decision Amid Middle East Tensions: What Bombshells Will Powell Drop Tonight?

①The Federal Reserve Chairman Powell will hold his second-to-last FOMC meeting tonight during his tenure as Chair; ②Currently, industry consensus generally expects that, faced with the high uncertainty caused by the Middle East conflict, the Fed has no choice but to hold steady this week…

The Federal Reserve Chairman Powell will hold his second-to-last FOMC meeting tonight during his tenure as Chair. Currently, industry consensus generally expects that, faced with the high uncertainty caused by the Middle East conflict, the Fed has no choice but to hold steady this week…

Pricing in the interest rate futures market indicates that the probability of the FOMC cutting rates at tonight’s meeting is nearly zero— the federal funds rate target range is expected to remain at 3.5% to 3.75%, with no rate cuts in the near future. According to the latest futures pricing, policymakers are unlikely to consider easing until at least September, with a more probable move in October, and even then, at most one rate cut this year.

However, within the Fed, hawks and doves are very likely to have a heated debate tonight about how the Middle East war pressures their dual mandate, and whether future rate cuts to address slowing economic growth will exacerbate inflation that has been above the Fed’s target for five consecutive years.

“Whenever the Fed’s dual mandate becomes conflicting, debates intensify,” said Diane Swonk, Chief Economist at KPMG. “The reality is, considering that U.S. inflation (above 2%) has persisted for five years and the risks of it becoming more entrenched are increasing, the Fed doesn’t have the luxury of ignoring it like other central banks do.”

According to the schedule, Fed officials will release a statement after the meeting at 2 a.m. Beijing time, followed by a 30-minute press conference by Chair Powell. Since this is a quarterly meeting at the end of each quarter, the latest quarterly economic projections (SEP), including the dot plot, will be released simultaneously with the monetary policy statement, which investors should pay close attention to…

Below is Caixin’s specific preview of tonight’s Fed decision:

① What changes might there be in the post-meeting statement?

Industry experts generally expect the FOMC to mention the Iran conflict in the statement, hinting that the escalation has increased geopolitical and economic uncertainty. Officials may also need to update their description of the labor market to reflect recent fluctuations in employment data. Some Fed observers are also curious about how the Fed will characterize inflation after recent energy price increases…

It’s worth noting that the January meeting minutes showed several officials supported language acknowledging “risks (to the outlook) are two-sided (uncertain),” meaning they are open to rate hikes if inflation remains high. Nearly half of economists surveyed by industry media expect this language to be included in the current meeting, but weak employment data and uncertainties related to the Iran conflict could reduce support for rate hikes.

Nick Timiraos, a well-known journalist often called the “New Fed Correspondent,” wrote earlier this week that if this change is made, it could mark the Fed’s first acknowledgment that the easing cycle may be over.

Currently, some Wall Street investment banks have released their own revised forecasts for the Fed’s statement.

Goldman Sachs believes the FOMC statement may acknowledge that the Iran conflict has increased uncertainty and could temporarily boost inflation and slow economic activity. The statement might also describe economic activity as “moderate” rather than “solid.” Given the latest employment data, the committee may also modestly downgrade its description of the labor market.

Morgan Stanley expects only minor modifications to the statement, maintaining the previous language that the unemployment rate is “slightly higher but still low,” rather than “showing some signs of stabilization.” They expect the statement to retain the previous forward guidance regarding the “magnitude and timing of future adjustments to the federal funds rate target range.”

Morgan Stanley believes the Fed is prepared to ignore the overall inflation increase caused by high oil prices. The description that inflation remains “elevated” may also stay unchanged, although the statement might mention the rise in oil prices since the January meeting.

② Will there be multiple dissent votes tonight?

The January FOMC meeting saw two Fed governors voting against the majority—familiar names Milan and Waller, both supporting a 25 basis point rate cut.

Currently, many industry insiders expect 2-3 “doves” to oppose rate cuts in tonight’s meeting. Especially since Fed Governor Bowman has recently expressed dovish views, increasing her risk of joining the rate-cut support camp.

Waller has said in recent weeks that if the strong employment momentum in January diminishes in February, he would support a rate cut—and the “negative non-farm payrolls” data earlier this month confirmed that. Milan has called for four rate cuts this year, emphasizing the need to act early.

Timiraos pointed out that this week, all three of these governors could potentially vote for a rate cut. The key isn’t the number of votes but that all three are appointed by a president who has publicly called for rate cuts. Since 1988, there has never been a case where three governors collectively voted against the majority at the same policy meeting.

It’s important to note that votes by Fed governors differ in weight from those by other decision-makers because of the organizational structure. Fed governors have permanent voting rights on the FOMC as long as they serve, while regional Fed presidents rotate their voting rights annually.

On Wall Street, Goldman Sachs also expects three governors to oppose the rate cut, supporting a 25 basis point reduction, driven by recent labor market data that could push Bowman to join Milan and Waller. Morgan Stanley also expects these three to support the rate cut.

③ What changes might there be in the dot plot?

The biggest highlight of tonight’s Fed decision may be the release of the first dot plot of the year. Investors will have a chance to gain deeper insight into Fed officials’ outlook for interest rates over the coming years.

(December Fed dot plot)

Due to the high uncertainty surrounding the war and the significant economic impact largely dependent on the duration of the Middle East conflict, the Fed’s economic and rate forecasts tonight are highly uncertain. President Trump had previously suggested the conflict would end soon, within weeks, but this is hard to verify. Iran has recently threatened to push oil prices above $200 per barrel.

Goldman Sachs expects the median interest rate in 2026 shown in the latest dot plot to be between 3.25% and 3.50%, with the rates for 2027, 2028, and longer-term likely between 3.00% and 3.25%.

This implies a rate cut in 2026, followed by another in 2027, bringing rates to a neutral level. This is consistent with the December dot plot. Goldman surmises that some Fed officials may support an early rate cut due to recent negative labor market signals, while others may prefer to delay because of inflation concerns.

Of course, as mentioned earlier, predicting the dot plot tonight is quite challenging, and the “dots” from officials could be very dispersed. Wilmington Trust’s Chief Economist Luke Tilley said, “Given the divided opinions within the committee, the forecast will be very scattered. It’s really hard to make a precise prediction now. All fundamental factors are changing rapidly, so I expect significant variation in the results.”

Timiraos, often called the “New Fed Correspondent,” said Tuesday that the interest rate dot plot forecast will likely dominate the market’s reaction to this week’s Fed meeting. Notably, in December, 12 out of 19 Fed officials expected at least one rate cut this year. But if just three change their views, the median dot could be lowered to zero.

④ How will the Fed revise inflation and economic outlooks under Middle East conflict?

The latest interest rate dot plot will be included in the Economic Projections (SEP). Officials’ forecasts for inflation, GDP, and unemployment may also offer clues on how they expect oil shocks to influence the economy over the long term.

Ahead of this meeting, the Fed’s preferred inflation indicator—the core PCE price index (excluding volatile food and energy)—accelerated to 3.1% in January, up from 2.6% in April last year.

Timiraos pointed out that once Fed officials raise inflation forecasts, expectations for rate cuts become less tenable, especially for those who believe current rates are near a neutral level that neither stimulates nor hampers growth. However, dovish members might argue that oil shocks could squeeze household spending and curb consumption, reinforcing their case for keeping rate cuts on the table.

Currently, the latest economic outlook may indeed show a downward revision of the Fed’s 2026 forecast. Goldman’s expected changes include:

• Core inflation YoY revised up by 0.2 percentage points to 2.7%;
• Overall inflation YoY revised up by 0.6 percentage points to 3.0%;
• GDP growth lowered by 0.2 percentage points to 2.1%;
• Unemployment rate raised by 0.2 percentage points to 4.6%.

⑤ What are the key points of Powell’s press conference?

Finally, a major highlight of tonight’s Fed decision will likely be Powell’s remarks.

Industry experts expect Powell to emphasize that officials need more time to observe how long the Iran conflict lasts and to assess its potential chain reactions on economic growth and inflation. He may also highlight the high uncertainty of the current environment and the need for the Fed to maintain policy flexibility.

BeiChen Lin, Senior Investment Strategist at Russell Investments, said that the outcome of tonight’s decision is almost certain—likely to be a hold in March. But any hints Powell gives about the future rate path will be crucial. Broadly, the U.S. economy remains on a solid footing. However, this means the threshold for further rate cuts could be quite high.

A report from U.S. Bank states, “Since markets have almost fully priced out a rate cut in April, Powell’s ability to guide the market will depend on how much market participants believe his comments reflect the committee’s consensus rather than his personal view. Powell’s task tonight will be challenging.”

At the press conference, reporters may also ask Powell whether he plans to stay at the Fed after his term ends in May. Former Fed Governor Kevin W. has been nominated by President Trump to succeed Powell, but North Carolina Senator Thom Tillis has blocked W.’s confirmation, promising not to support W.’s nomination until the Justice Department’s investigation into the Fed concludes.

Last week, a U.S. judge blocked the Justice Department’s January subpoena related to renovation costs, and court documents showed Powell felt it necessary to remain at the Fed at least until legal proceedings end.

Powell has avoided such questions in recent press conferences, and it remains unclear how much he will participate in discussions.