The Federal Reserve Keeps Its Cards Close to Its Chest

As expected, Fed officials once again opted for the status quo today. Markets and Bloomberg‑surveyed forecasters had fully anticipated this decision.

That said, the economic landscape has not remained unchanged since the January meeting. The outlook has become more uncertain following the outbreak of conflict in Iran and, more importantly, disruptions to transportation in the Persian Gulf. The statement accompanying today’s decision briefly acknowledges this new reality. The Fed now finds itself navigating another layer of fog and appears intent on waiting for greater clarity before signalling its next moves more explicitly.

The limited changes in today’s statement compared with January’s are also reflected in the updated policy rate projections released by Fed officials. Expected rates for the end of 2026—and for the two subsequent years—are identical to the projections published in December. Only the long‑run rate estimate was revised slightly higher, from 3.0% to 3.1%. As a result, policymakers foresee just one 25‑basis‑point cut to the federal funds target this year and another in 2027. Still, it is worth noting that the composition of the median projection has shifted: fewer officials now see more than one rate cut this year as necessary.

On the economic forecast front, real GDP growth is expected to be somewhat stronger this year and next, while unemployment projections remain unchanged. Inflation, however, is now expected to be higher. The forecast for year‑over‑year growth in the personal consumption expenditures deflator at the end of 2026 was revised upward from 2.4% to 2.7% for the headline index, and from 2.5% to 2.7% for the core measure excluding food and energy. Fed officials nonetheless anticipate that inflation will be lower in 2027. It seems that, like us, they assume the inflationary impact of the current crisis will prove transitory.

During the press conference, Jerome Powell emphasized that they are well aware of the performance of inflation over the last few years and how a series of shocks (COVID‑19, supply‑chain disruptions, the war in Ukraine, higher tariffs) has interrupted its progress. The Middle East conflict is now being added to this list. At the same time, he stressed the uncertainty surrounding the current shock, noting that “the net effect of the oil shock will still be some downward pressure on spending and employment, and upward pressure on inflation.” These opposing pressures on the Fed’s dual mandate limit the likelihood of any swift adjustments to policy rates.