Huatai Securities March FOMC Preview: Middle East Developments Do Not Impact Federal Reserve Guidance

Huatai Securities points out that the Federal Reserve will announce its March policy decision in the early morning of March 19th (Thursday) Beijing time. Recent conflicts in the Middle East have caused oil prices to rise significantly, and the market is watching whether the Fed will turn hawkish due to potential stagflation risks. Huatai Securities believes that the Fed’s March meeting will keep interest rates unchanged, lower growth forecasts, raise inflation forecasts, but keep the dot plot’s rate cut guidance unchanged; attention will be on Powell’s comments regarding the impact of Middle East tensions and his stance on whether to remain as a board member.

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Huatai | Macro: March FOMC Outlook - Middle East Changes Do Not Currently Affect Fed Guidance

Key Points

The Federal Reserve will announce its March policy decision in the early morning of March 19th (Thursday) Beijing time. Recent conflicts in the Middle East have caused oil prices to rise sharply, and the market is watching whether the Fed will adopt a hawkish stance due to potential stagflation risks. We believe that the Fed’s March meeting will keep interest rates steady, lower growth forecasts, raise inflation forecasts, but keep the dot plot’s rate cut guidance unchanged; attention will be on Powell’s remarks about the impact of Middle East tensions and his comments on whether to stay on as a board member.

Although oil prices have risen significantly recently, we expect the Fed to continue holding policy rates steady in March. Since the January FOMC, CPI inflation data has been generally moderate in January and February. February non-farm payroll data fell unexpectedly due to data distortions, reducing the urgency for the Fed to adjust monetary policy. Since the escalation of Middle East conflicts on February 28, WTI crude futures have risen by a total of 43%, pushing inflation expectations higher. The Fed’s expectation of a rate cut in 2026 has been revised down to just one cut. Traditionally, the Fed does not respond to short-term inflation increases caused by supply shocks, and given the ongoing uncertainties in the Middle East, we expect the March meeting to keep rates unchanged and wait for further developments before reacting.

Regarding forward guidance, we expect Powell to emphasize the downside risks to employment and upside risks to inflation from Middle East conflicts, maintaining a wait-and-see stance; on economic forecasts, we expect the Fed to lower growth forecasts, raise inflation forecasts, and keep the dot plot guidance of one rate cut in 2026. Specifically,

• For forward guidance, we expect Powell to adopt a cautious stance. The Middle East conflict has increased the “stagflation risk” faced by the U.S. economy. Powell is likely to highlight the downside employment risks and upside inflation risks stemming from Middle East tensions, noting significant uncertainties ahead, and that the Fed needs to wait until these uncertainties subside before making decisions (wait and see). Additionally, attention will be on whether Powell comments on his reappointment as a board member during the press conference.

• Regarding economic forecasts and the dot plot, we expect the Fed to lower growth forecasts, raise inflation forecasts, and maintain the guidance of one rate cut in 2026-2027. Since the outbreak of Middle East conflicts, U.S. crude futures prices suggest that the implied average price for WTI in 2026 is close to $85 per barrel, roughly 30% higher than the end-of-January average, which could push U.S. inflation in 2026 up by over 0.2 percentage points and erode consumer purchasing power, somewhat dampening growth. Considering the downward growth and upward inflation pressures, the Fed may stick to the December dot plot guidance of one rate cut in 2026-2027, which aligns with current market pricing.

Looking ahead, we maintain our view that the Fed will pause rate cuts in the first half of the year, as it needs time to observe the progression of Middle East conflicts and their impacts. In the second half, the path of rate cuts remains highly uncertain. Since the conflict escalated, Fed rate cut expectations have retreated significantly, mainly due to rising oil prices. If oil prices continue to rise further, the rate cut expectations could decline further. Conversely, if tensions ease in the second half and oil prices fall from high levels, concerns about stagflation may ease. After Warsh takes over as Fed Chair later this year, there remains a possibility of rate cuts. However, if the conflict persists at high intensity and inflation expectations become unanchored, the Fed could face credibility challenges, potentially increasing volatility in long-term interest rates.

Risk warning: Unexpected global energy shocks, resurgence of geopolitical conflicts.

(Source: People’s Financial News)