【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 maintained the benchmark interest rate in the 3.50% to 3.75% range, and the dot plot also kept the path of a 1 percentage point cut in 2026. Amid the uncertain Middle East situation, members provided slightly upward revisions to their SEP forecasts for the economy, inflation, and productivity. Financial Square also provided scenarios for oil prices, inflation expectations, and interest rate developments!

Key points of this article:

2. At this meeting, the committee voted 11:1 to keep the interest rate unchanged in the 3.50% to 3.75% range, with the statement adding that the high uncertainty surrounding the Middle East situation poses a risk.

3. The dot plot still indicates 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%), respectively, suggesting members view the impact of the US-Iran conflict on inflation as a short-term shock. Additionally, the committee upgraded the US economic growth estimate, reflecting recent productivity improvements.

5. During the press conference, Powell maintained a neutral, watchful stance, stating that the high uncertainty in the Middle East makes precise predictions difficult. The Fed will decide in the next six weeks based on how the situation develops. When asked about rate hikes, Powell emphasized that although discussions occurred, this is not the baseline scenario for the Fed.

1. Fed March Meeting Holds Steady, Focus on Uncertainty in US-Iran Conflict!

In this meeting, the Fed’s voting members approved 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 high uncertainty surrounding the Middle East situation poses a risk. This signals the Fed’s short-term cautious stance pending further developments. Key points from the statement are summarized below:

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

The economic section of the statement saw little change from the previous one, maintaining that economic activity remains solid. The description of the unemployment rate was changed from “showing signs of stabilization” to “little changed in recent months.” Also, the paragraph on the dual mandate did not reintroduce the concern about increased downside risks to employment, indicating the Fed does not see further weakening in the labor market.

Regarding inflation, the Fed continues to state that it remains somewhat elevated, and added that the impact of the Middle East situation on the US economy is highly uncertain.

Interest Rate Guidance: No Change in Easing Attitude

The forward guidance on interest rates remains unchanged, retaining language about possible additional cuts since September 2025, and the reintroduction in December 2025 of the phrase “more cautious assessment of the extent and timing,” indicating the Fed is ending its series of rate cuts but remains inclined toward easing.

Monetary Policy Stance: Acting According to Future Inflation Trends

Eleven out of twelve voting members agreed to keep the rate 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 would act based on economic data after observing how the Middle East situation unfolds, maintaining a cautious approach to monetary policy.

2. Dot Plot Maintains 1 Rate Cut in 2026 and 2027

The market’s main focus was on the Fed’s interest rate path for this year. The latest March dot plot shows a more concentrated distribution for 2026, with seven members supporting no cut, seven supporting a 1-percentage-point cut, two supporting a 2-percentage-point cut, and three supporting cuts greater than 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 was slightly raised to 3.125%, and the dot plot still shows an inverted yield curve, reflecting the committee’s view that the inflation impact from the Middle East is short-term, with room to lower rates as inflation slows.

Overall, the 2026–2027 rate cuts are both projected at 1 point, signaling the Fed’s continued easing stance. Two notable points are:

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 was raised again to 3.125%, reflecting the inclusion of productivity growth in the economic outlook, which could help moderate inflation.

Further details will be discussed during the press conference.

3. Slight Upward Revision of US Economic and Inflation Forecasts, with a View on Productivity Gains!

The Fed’s latest SEP (Summary of Economic Projections) slightly raised the 2026 GDP 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%). Coupled with a 1-percentage-point rate cut this year, this suggests members see the war’s inflation impact as short-term, with room for rate cuts before 2026. The long-term economic growth and neutral rate were raised to 2% (from 1.8%) and 3.1% (from 3%), respectively, indicating expectations of productivity improvements.

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

• Slight upward revision of GDP growth: 2.4% (from 2.3%), 2.3% (from 2.0%), and 2.1% (from 1.9%). The long-term growth estimate was raised to 2.0% (from 1.8%).
• Unemployment rate forecasts remain roughly unchanged: 4.4%, 4.3%, and 4.2%.
• Slight upward revision of PCE inflation: 2.7% (from 2.4%), 2.2% (from 2.1%), and 2.0% (from 2.0%).
• Slight upward revision of core PCE inflation: 2.7% (from 2.5%), 2.2% (from 2.1%), and 2.0% (from 2.0%).
• Interest rate path remains unchanged, with a gradual decline to around 3.4%–3.1%, but the long-term rate was slightly raised to 3.1% (from 3.0%).

4. The Fed Continues Monthly Treasury Purchases to Inject Liquidity

Following the October 2025 meeting where the Fed announced the end of balance sheet runoff and the December 2025 meeting where it resumed short-term debt purchases, the NY Fed has been executing Reserve Management Purchases (RMPs) of short-term Treasuries since December 12, 2025. Details and liquidity impacts are summarized below:

Liquidity Impact of Short-Term Debt Purchases as of March 2026:

According to the NY Fed’s plan, the Fed will begin actively purchasing Treasury securities with maturities of one year or less, and if needed, securities up to three years. The RMPs will be announced on the 9th business day of each month. Before the April 15 tax deadline, purchases are expected to remain around $40 billion per month to offset the increase in non-reserve liabilities.

The latest balance sheet shows US Treasury holdings increased from a low of $4.19 trillion to $4.35 trillion, with an average monthly increase of $43.5 billion from December 2025 to February 2026, preventing the balance sheet from shrinking further.

On the liability side, despite the TGA remaining high at around $937.6 billion, reserve balances have begun to rise again, recently surpassing $300 billion, indicating that short-term debt purchases have expanded the balance sheet and provided market liquidity. The press conference after this meeting did not specify whether the $40 billion monthly purchase plan will continue after April, so ongoing monitoring is recommended as a key indicator of market liquidity during the Fed’s pause on rate hikes.

Note: The purpose of the Fed’s short-term debt purchases is to maintain ample reserve levels, which have fallen to sufficient levels, and to prevent excessive volatility in short-term interest rates. Controlling the policy rate’s upper and lower bounds is a key aspect of the Fed’s credibility. When members perceive risks to policy rate control, decisive monetary actions are often taken.

5. Powell’s Post-Meeting Press Conference Highlights

[Content not provided; likely a summary of Powell’s remarks emphasizing cautious outlook and uncertainty management.]

Already a subscriber? If so, please log in here.

Become a subscriber for full M Square services.

• Unlimited macro chart browsing
• Exclusive reports on key global indices and events
• Research toolkit with custom charts and backtesting
• Access to a professional macro community with shared insights

Subscribe now.