Fed Signals Openness to Rate Hikes

Some Fed officials favoured a two-sided framing of future rate decisions, highlighting that additional increases could be warranted if inflation persists above target levels, minutes from the last FOMC meeting in March showed. The vast majority of participants judged that upside risks to inflation and downside risks to employment were elevated, and the majority of participants noted that these risks had increased with developments in the Middle East. A prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices and these higher input costs would be more likely to pass through to core inflation. The Fed left the federal funds rate steady at the 3.5%–3.75% target range for a 2nd consecutive meeting in March 2026, in line with expectations. However, policymakers still signaled one reduction in the fed funds rate this year and another in 2027, though the timing remains unclear.

The Fed left the federal funds rate steady at the 3.5%–3.75% target range for a 2nd consecutive meeting in March 2026, in line with expectations. Policymakers noted that economic activity has been expanding at a solid pace, job gains have remained low while inflation remains somewhat elevated. The implications of the war with Iran are uncertain. Against this backdrop, policymakers still expect one reduction in the fed funds rate this year and another in 2027, the same as in the December projections, though the timing remains unclear. The Fed also revised its GDP growth forecasts higher for both 2026 (2.4% vs 2.3% seen in December) and 2027 (2.3% vs 2%). Unemployment is projected at 4.4% for 2026, unchanged from December and 4.3% for 2027 (revised up from 4.2%). Both PCE and Core PCE inflation are now expected to be higher this year, at 2.7% each, compared with the December projections of 2.4% and 2.5%, respectively. For 2027, both measures have been revised up to 2.2% from 2.1%.

The Federal Reserve is widely expected to hold the federal funds rate steady within the 3.5%–3.75% target range for a second consecutive meeting in March 2026, as it navigates a challenging environment marked by the risk of an oil shock, persistent inflation, and signs of a softening labor market. Since the January FOMC meeting, oil prices have surged amid the conflict with Iran, raising concerns that inflation could accelerate before it has returned to the Fed’s target. Against this backdrop, policymakers are likely to signal a continued wait-and-see stance, effectively adhering to a “first, do no harm” approach. The central bank will also release updated economic projections, with markets closely watching for any revisions reflecting the war’s potential impact on inflation, economic growth, and the future path of interest rates.