As expected, the Federal Open Market Committee (“FOMC”) held the fed funds target rate steady at 3.50% to 3.75% following their March meeting. The lone dissent to the decision came from Stephen Miran, who once again called for a 25-basis point cut – his fifth straight dissent. There were few changes in the Fed statement, namely an acknowledgement that “the unemployment rate has been little changed in recent months” and a reference to the current conflict in the Middle East, with the FOMC stating “The implications of developments in the Middle East for the U.S. economy are uncertain.”
With that said, the emphasis should be on the potential for higher energy costs to impact the Fed’s views on the economy. Admittedly, the quarterly update of economic projections reflected an increase in core PCE from +2.5% in December to +2.7% but also showed an increase in growth expectations for 2026, from +2.3% to +2.4%, with unemployment still expected at 4.4%.
However, during the press conference, Fed Chair Jerome Powell clarified that in the short-term energy prices alone would not translate to higher core inflation, only headline; instead, he cited continued stickiness as a result of the transmission of tariffs combined with the potential for energy price passthrough to end consumers as the rationale for higher core price estimates. In addition, Powell attributed the increase in growth expectations to a rise in productivity on the back of AI implementation, squaring the persistence of the low hiring dynamic (and stable unemployment rate) despite higher economic growth.
The dot plot, the result of the Fed’s updated calculus, showed little change from December, with the median official expecting one quarter point cut in 2026 and another in 2027. Powell appeared to point to the importance of the concept of the median, however, stating that there were some shifts among the nineteen submissions in the direction of fewer cuts – a more hawkish point against the backdrop of the modestly dovish projections and statement.
The most surprising portion of the press conference came as Powell confirmed that he would not only remain on as “chairman pro-tem” should his successor remain unconfirmed at the end of his term, he would also continue at the Fed through the conclusion of the Department of Justice investigation, and has not yet made a decision about serving through the remainder of his term (January 2028) as a Fed board member.
Markets, which had already moved on a hotter-than-expected February PPI release (+0.7% vs. +0.3% month-over-month), reacted poorly to Powell’s comments. U.S. equities moved lower and Treasury yields moved higher, perhaps an indication that despite the unchanged dot plot, investors believe higher inflation – not a deteriorating labor market – will be the driver of Fed policy over the coming months. The uncertainty around the duration and knock-on effects of the escalation in the Middle East was apparent in Powell’s comments but the undercurrent of tariffs as a continued source of pricing pressure is likely to create discomfort even for those who believe there is a near term off-ramp for the U.S. in Iran.
We believe the Fed still has some room to move this year, despite the threat of short-term upward pressure on prices. We remain constructive on global equities, with a continued emphasis on active selection across geographies; we also continue to favor quality and value, while admitting that there are likely to be opportunities in AI-related issues over the next several months. Within fixed income, dispersion is creating opportunities, and given our rate outlook, there may be opportunities to add duration as the Middle East conflict response evolves. We encourage investors to review their current allocations, and to rebalance as appropriate to long-term targets with an eye towards global diversification
