【Market Flash】Fed Holds Steady, M-Squared Provides Oil Price, Inflation, and Rate Path Outlook!

What we want you to know:
In March, the Federal Reserve FOMC kept the benchmark interest rate in the 3.50% to 3.75% range, and the dot plot maintained the path of a 1 percentage point cut in 2026. Amid the uncertain Middle East situation, members provided slightly upward revisions to economic, inflation, and productivity forecasts in the SEP, while financial analysts offered scenarios on oil prices, inflation expectations, and interest rate developments!

Key points of this article:

2. In this meeting, members voted 11:1 to keep the interest rate in the 3.50% to 3.75% range, with the statement adding high uncertainty risks from the Middle East.

3. The dot plot still shows a path of one rate cut in 2026 and 2027, signaling the Fed’s stance remains cautious but leaning toward easing.

4. The SEP slightly raised the 2026 economic growth forecast to 2.4% (from 2.3%), inflation and core inflation to 2.7% (from 2.4%) and 2.7% (from 2.5%), indicating members see the US-Israel conflict as a short-term inflation shock. Additionally, they revised up the US economic growth estimate, reflecting recent productivity gains.

5. During the press conference, Powell maintained a neutral, cautious attitude, stating that the high uncertainty in the Middle East makes precise predictions difficult. The Fed will decide in the next six weeks based on evolving developments, and when asked about rate hikes, he emphasized that although discussions occurred, it is not the baseline scenario.

1. Fed March Meeting Holds Steady, Focus on Middle East Uncertainty!

In this meeting, the Fed’s voting members agreed 11:1 to keep the benchmark rate in the 3.50% to 3.75% range, with the statement maintaining that economic activity remains solid, and adding that the impact of the Middle East situation on the US economy is highly uncertain. This signals a cautious stance, awaiting further developments. Key points from the statement:

Economic and Inflation Outlook: Steady Economy, Watchful on Middle East Risks

The economic outlook remains largely unchanged, describing activity as solid. The description of the unemployment rate was updated from “showing signs of stabilization” to “little changed in recent months.” The paragraph on the dual mandate did not reintroduce concerns about increased downside risks to employment, indicating the Fed does not see further weakening in the labor market.

Regarding inflation, the Fed maintains that it remains somewhat elevated and added that the impact of the Middle East conflict on US inflation is highly uncertain.

Interest Rate Guidance: No Change in Easing Path

The forward guidance on interest rates remains unchanged, retaining language about possible additional cuts since September 2025, and the phrase “more cautious assessment of the extent and timing” reintroduced in December 2025. The Fed signals no intention to end rate cuts but remains on a path toward easing.

Monetary Policy Approach: Acting According to Future Inflation Trends

Eleven out of twelve members agreed to keep rates in the 3.50% to 3.75% range. Only Stephen I. Miran, nominated by Trump, supported a 1-percentage-point cut at this meeting (previously supported 2 cuts). Most members, like Powell, indicated they prefer to act based on economic data after assessing the Middle East situation, maintaining a cautious stance.

2. Dot Plot Maintains 2026 and 2027 Rate Cuts of 1 Percentage Point Each

The market’s focus was on the Fed’s interest rate path. The latest March dot plot shows a more concentrated distribution for 2026: 7 members support no change, 7 support a 1-percentage-point cut, 2 support a 2-percentage-point cut, and 3 support cuts exceeding 2 points. The median remains at a 1-percentage-point cut, in the 3.25% to 3.50% range, though most members have lowered their expectations for the size of cuts.

For 2027, the rate is expected to stay in the 3.00% to 3.25% range, with a 1-percentage-point cut forecast. The 2028 median remains at 3.00% to 3.25%, indicating an end to rate cuts. The long-term median rate has slightly increased to 3.125%, and the dot plot still shows an inverted yield curve, reflecting the view that the Middle East’s inflation impact is short-term, with room for future rate reductions as inflation slows.

Overall, 2026–2027 rate cuts are expected to be 1 percentage point each, signaling the Fed’s continued easing stance. Notably:

2. One member projects a rate hike in 2027, which was a focus of questions during the press conference. Powell said discussions about rate hikes occurred but are not the baseline scenario.

3. The long-term neutral rate has been raised again to 3.125%, incorporating productivity growth estimates, which will influence economic growth and inflation outlooks.

Further details will be discussed during the press conference.

3. Slight Upward Revision of US Economic and Inflation Forecasts, Reflecting Productivity Gains

The SEP (Summary of Economic Projections) slightly raised the 2026 GDP growth forecast to 2.4% (from 2.3%), with the unemployment rate unchanged at 4.4%. Inflation forecasts were also modestly increased: inflation and core inflation to 2.7% (from 2.4%) and 2.7% (from 2.6%). The rate cut of 1 percentage point in 2026 reflects the view that the war’s inflation impact is short-term, with room for easing before 2026. The upward revision of long-term growth and neutral rates to 2% (from 1.8%) and 3.1% (from 3%) indicates improved productivity expectations.

Forecasts for the next three years (2026–2028):

• Slightly higher GDP growth: 2.4% (from 2.3%), 2.3% (from 2.0%), 2.1% (from 1.9%).
• Unemployment rate remains roughly unchanged: 4.4%, 4.3%, 4.2%.
• Slight upward revision of PCE inflation: 2.7% (from 2.4%), 2.2% (from 2.1%), 2.0%.
• Slight upward revision of core PCE inflation: 2.7% (from 2.5%), 2.2%, 2.0%.
• Interest rate path remains steady, with a gradual decline forecast: 3.4%, 3.1%, 3.1%, with the long-term rate slightly increased to 3.1%.

4. Fed Continues Monthly Treasury Purchases to Support Market Liquidity

Following the October 2025 meeting, when the Fed announced the end of balance sheet runoff and the start of short-term debt purchases in December, the New York Fed has been executing Reserve Management Purchases (RMPs) since December 12, 2025. Details and liquidity impacts:

Liquidity Impact as of March 2026:

The NY Fed’s plan involves actively purchasing Treasury securities with maturities under one year, and if needed, up to three years. The RMPs are announced on the 9th business day of each month. Before the April tax deadline, purchases are expected to remain around $40 billion per month to offset increased liabilities from non-reserve liabilities.

The Fed’s balance sheet shows holdings of US Treasuries rising from $4.19 trillion to $4.35 trillion between December 2025 and February 2026, with an average monthly increase of $43.5 billion, preventing the balance sheet from declining further.

Liability structure indicates that, despite high levels of TGA at $937.6 billion, reserve balances have begun to rise again, recently surpassing $300 billion, reflecting the expansion of the balance sheet through short-term debt purchases. The post-meeting press conference did not specify whether RMPs will continue at the current high level after April, so ongoing monitoring is recommended as a key indicator of market liquidity during the rate pause.

Note: The purpose of Fed’s short-term debt purchases is to maintain ample reserve levels, avoiding excessive short-term interest rate volatility. Controlling the policy rate’s upper and lower bounds is a key part of the Fed’s credibility, and if risks threaten this control, decisive monetary actions are typically taken.

5. Powell’s Post-Meeting Press Conference Highlights

[Content not provided; likely a summary of Powell’s remarks emphasizing cautious outlook, uncertainty, and data-dependent policy.]

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