US Fed holds rates steady amid persistent inflation concerns

The United States Federal Reserve (US Fed) kept interest rates unchanged at 3.5–3.75 percent, as retail inflation remained above expected levels amid intensifying geopolitical conflicts in the Middle East. The decision was taken by a majority, with only Stephen Miran favouring a 25 basis point (bps) rate cut, following the three-day Federal Open Market Committee (FOMC) meeting held from March 16–18, 2026. Policymakers expressed concern about rising crude oil prices and their potential impact on inflation and the broader economy.

“We remain squarely focused on achieving our dual goals of maximum employment and 2 percent retail inflation. The U.S. economy has been expanding at a solid pace. While job gains have moderated, the unemployment rate has changed little in recent months, and inflation remains somewhat elevated. Therefore, the FOMC decided to leave the policy rate unchanged, which we believe is appropriate to promote progress toward our dual goals. The implications of developments in the Middle East for the U.S. economy are uncertain,” said Jerome Powell while announcing the policy decision.

James Knightley, Chief International Economist (United States) at ING Economics, saw no surprise in the Fed’s decision. “There is nothing particularly surprising about the Federal Reserve’s outcome. A ‘no change’ decision, with a target range of 3.5–3.75 percent, saw only Stephen Miran dissent by voting for a 25 bps cut. Everyone else favoured stable rates, but the Fed continues to believe a rate cut this year is more likely than not. The Fed appears prepared—for now—to look through a near-term energy price shock, believing that this won’t become a broader, more persistent inflationary problem requiring action.”

Meanwhile, the accompanying statement acknowledged that “uncertainty about the economic outlook remains elevated” and reiterated that “the implications of developments in the Middle East for the U.S. economy are uncertain.” Chair Powell also emphasised the challenges of making projections in the current environment but maintained that economic activity remains “solid.” For now, the updated forecasts show that the Fed has retained its projection of a rate cut in 2026 from its December update and continues to anticipate a further 25 bps cut in 2027.

Past trend
From last September through December, the United States Federal Reserve lowered the key policy rate by 3/4 of a percentage point, bringing it within a range of plausible estimates of neutral. This normalization of the policy stance should help stabilize the labour market while allowing inflation to resume its downward trend toward 2 percent. However, the implications of developments in the Middle East for the U.S. economy remain uncertain.

In the near term, higher energy prices are likely to push up overall inflation, but it is too soon to determine the scope and duration of the potential effects on the economy. The US Fed clarified that it will continue to monitor risks to both sides of its mandate. At the same time, the central bank indicated its preparedness to determine the extent and timing of any additional adjustments to the policy rate based on incoming data, the evolving outlook, and the balance of risks.

GDP growth
Interestingly, the United States Federal Reserve has revised upward its gross domestic product (GDP) growth forecast for the fourth quarter of 2026 to 2.4 percent year-on-year, compared with 2.3 percent earlier. Its fourth-quarter 2027 GDP growth projection now stands at 2.3 percent versus 2 percent previously. The GDP outlook for 2028 has also been raised. Most significantly, the Fed has revised its long-run GDP projection to 2 percent from 1.8 percent, suggesting it is factoring in the productivity-boosting effects of AI and technology investment.

Meanwhile, inflation forecasts have been revised only slightly higher for this year, with the core personal consumption expenditure (PCE) deflator now projected at 2.7 percent versus 2.5 percent earlier for the fourth quarter of 2026. The projection for the fourth quarter of 2027 has been nudged up by 0.1 percentage point to 2.2 percent, while the 2028 estimate remains unchanged at 2 percent. Unemployment forecasts are largely unchanged, with the long-run Fed funds rate revised up by 0.1 percentage point to 3.1 percent.

“Available indicators suggest that economic activity has been expanding at a solid pace. Consumer spending has been resilient, and business fixed investment has continued to expand. In contrast, activity in the housing sector has remained weak. The median participant projects that real GDP will rise 2.4 percent this year and 2.3 percent next year, somewhat stronger than projected in December,” Jerome Powell added.

High unemployment rate
In the labour market, the unemployment rate stood at 4.4 percent in February and has changed little since late last summer. Job gains have remained modest. A significant part of the slowdown in job growth over the past year reflects a decline in labour force growth, driven by lower immigration and reduced labour force participation, although labour demand has also clearly softened.

Other indicators—including job openings, layoffs, hiring, and nominal wage growth—have generally shown little change in recent months. The median projection for the unemployment rate is 4.4 percent at the end of this year, with a gradual decline thereafter.

Transitory inflation
The United States Federal Reserve clarified that inflation has eased significantly from its mid-2022 highs but remains somewhat elevated relative to the 2 percent longer-run goal. Estimates based on the Consumer Price Index and other data indicate that total PCE prices rose 2.8 percent over the 12 months ending in February, while core PCE prices—excluding the volatile food and energy categories—rose 3 percent. These elevated readings largely reflect inflation in the goods sector, which has been supported by the effects of tariffs.

Near-term measures of inflation expectations have risen in recent weeks, likely reflecting the sharp increase in oil prices caused by supply disruptions in the Middle East. However, most measures of longer-term expectations remain consistent with the 2 percent inflation goal. The median projection in the SEP for total PCE inflation is 2.7 percent for this year and 2.2 percent for next year, slightly higher than projected in December.

Past comparison
It appears that the United States Federal Reserve is adopting a stance similar to 2021, when it believed inflation would be “transitory” during a supply shock and that there was no need to raise rates. However, at that time, robust hiring, soaring wage growth, pent-up demand following lockdowns, and stimulus checks led to a sharp increase in consumer spending, causing inflation to spiral higher. The Fed was then forced to play catch-up, hiking rates by 525 bps (5.25 percent) between March 2022 and July 2023.

Today, the labour market is in a much weaker position, with job creation and real household disposable income having stalled over the past six months. At the same time, confidence has been eroded by tariff concerns and job security fears, meaning there is not the same demand impetus to fuel inflation. While tax refunds are expected to be relatively substantial this year (around US$ 4,000 on average versus US$ 3,200 last year), they are unlikely to provide a fiscal boost comparable to stimulus checks that could generate enough demand to entrench inflationary pressures and trigger Federal Reserve rate hikes. Jerome Powell did note that the possibility of the Fed’s next move being a rate hike was discussed, but the “vast majority” do not see that as the likely outcome.

DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com