Tonight the Fed is expected to hold steady, stagflation alarms are sounding, how will Powell perform his "balancing act"?

Question AI · How Will Powell’s Term Ending Affect Policy Signals?

At 2 a.m. Beijing time on the 19th, the Federal Reserve will announce its interest rate decision. It is highly likely that in March, the Fed will keep rates steady, remaining cautious amid rising inflation risks from the Iran war and weakening employment data. The policy stance is expected to “continue to pause or delay rate cuts,” rather than resume rate hikes. Markets are closely watching the Summary of Economic Projections (SEP) and Chair Powell’s press conference language.

The current situation puts the Fed in a dilemma. Rising energy prices are putting additional upward pressure on inflation already above 2%, while a sharp drop of 92,000 in non-farm payrolls in February rekindles concerns about stagflation, forcing the committee to balance its dual mandates.

Market focus has shifted from “when to cut rates” to “whether to cut rates.” Morgan Stanley believes that due to weak employment and the Fed’s recognition that oil prices cause a one-time inflation impact, monetary policy risks are asymmetrical: Inflation upside will delay rate cuts rather than hikes, but in the case of employment decline, rate cuts will be favored.

Recent signals from multiple officials have become more dovish. Goldman Sachs and Morgan Stanley both expect the number of dissenting votes at this meeting to increase from two in January to three. Meanwhile, rising energy prices have led markets to reprice expectations: the number of rate cuts this year has been reduced from two to one, with the first cut pushed back to Q4.

Steady as the default, focus shifts to Powell’s language

The Fed will keep the federal funds rate target range at 3.50% to 3.75%, a consensus among major institutions. Morgan Stanley, Goldman Sachs, and Bank of America all share this outlook, differing only on the pace of future cuts.

Morgan Stanley maintains its forecast of two rate cuts in June and September (each by 25 basis points). The bank believes that due to weak February employment and the Fed’s recognition of oil prices’ one-time inflation impact, monetary policy risks are clearly asymmetrical:

When inflation exceeds target, rising oil prices are more likely to delay rate cuts—or lead to larger cuts when they occur—rather than prompting hikes.

Bank of America notes that given heightened geopolitical uncertainty, this meeting is unlikely to provide clear forward guidance. Their Fed observers state:

“The market’s ability to interpret Powell’s guidance depends on how much it perceives his comments as representing the committee’s consensus rather than individual views. Even without this constraint, Powell faces significant challenges.”

With Powell’s term ending in May, markets are expected to be especially cautious in interpreting his statements.

Bei Chen Lin, senior investment strategist at Russell Investments, said:

“The decision at this meeting is almost certain—holding rates steady. But any signals Powell gives about future rate paths will be crucial. Overall, the U.S. economy remains solid, meaning the threshold for further rate cuts could be quite high.”

Iran war and softening jobs data test dual mandates amid stagflation fears

The macro backdrop for this rate decision is highly complex, with the Fed facing conflicting signals.

On inflation, since the Iran conflict erupted, prices for energy, metals, and agricultural commodities have surged across the board. The preferred core PCE inflation rate has reached 3.1% year-over-year, rising 0.4% month-over-month, with little recent sign of substantive decline, significantly diverging from the 2% target.

On the labor market, the 92,000 drop in non-farm payrolls in February defies previous expectations of stabilization and will prompt sharp questions about stagflation in the post-meeting press conference. Stable initial jobless claims and some recovery in JOLTS data offer limited comfort, but overall conditions remain weak.

Fed Governor Waller explicitly stated that the current rise in energy prices is unlikely to trigger persistent inflation, which is a temporary issue policymakers may need to set aside for now; however, he remains highly attentive to the labor market, especially AI’s large-scale impact on employment.

Former Fed Vice Chair Roger Ferguson, in an interview with CNBC, expressed greater concern about inflation risks: “The Fed has been off its 2% target for many years. Over time, the public will question the credibility of that target.”

Limited changes expected in the dot plot; SEP emphasizes inflation and unemployment forecasts

The SEP will be released simultaneously after this meeting, with overall changes expected to be limited, though directional shifts are evident.

Goldman Sachs expects the median dot plot forecast to remain largely unchanged, with one rate cut in 2026 and 2027 each. The bank believes some committee members may have already priced in earlier rate cuts due to recent labor data, while others may delay cuts due to inflation concerns, roughly offsetting each other.

Regarding specific forecast adjustments:

Goldman Sachs expects the 2026 inflation forecast to be revised upward by about 0.6 percentage points to 3.0%, with core inflation up by 0.2 points to 2.7%. GDP growth is forecasted to be lowered by about 0.2 points to 2.1%, and the unemployment rate raised by about 0.2 points to 4.6%. These revisions largely offset each other in terms of interest rate implications.

Morgan Stanley believes the Fed will continue to follow its past practice of “recognizing” oil price shocks’ impact on overall inflation, maintaining one rate cut in 2026 and 2027. They forecast the median federal funds rate in 2026 to be between 3.25% and 3.50%, with longer-term neutral rates around 3.00% to 3.25%, consistent with last December’s SEP.

J.P. Morgan’s chief global strategist David Kelly noted: “Looking at Fed officials’ public statements, they may emphasize that Middle East conflicts add uncertainty to inflation and employment outlooks. However, their forecasts are likely to be similar to those from three months ago.”

It’s important to note that wartime economic forecasts are highly uncertain, heavily dependent on the conflict’s duration. Trump has hinted the conflict could end within weeks, but this remains unverified.

Support for increasing dissenting votes to three, dovish voices gaining marginal strength

At the January meeting, Waller and Miran voted for a 25 basis point rate cut, becoming the two dissenters. For this meeting, Goldman Sachs and Morgan Stanley both expect support for three dissenting votes.

Bowman explicitly stated on March 6 that the labor market needs more monetary policy support and maintained a stance of a total 75 basis points of rate cuts this year, with a clearly dovish tone.

Waller previously said he would support rate cuts if the strong employment momentum in January was not sustained in February—his view was confirmed by the sharp decline in February non-farm payrolls.

Miran is more aggressive, publicly calling for four rate cuts totaling 100 basis points this year and urging prompt action.

Nevertheless, dovish members remain a minority within the committee. The rest of the governors and the 2026 voters tend to be neutral or hawkish, with hawks considering current policy rates at or near neutral and cautious about further cuts. No committee members have publicly advocated for rate hikes.

Leadership succession uncertainty and policy direction still uncertain

Powell’s chairmanship ends in May this year. This meeting is his penultimate as chair. He may continue as a Fed governor until his term ends in 2028, but the usual practice is not to comment on such matters.

Trump’s nominee for vice chair, Waller, has faced delays in confirmation. Senator Thom Tillis said he would block Waller’s nomination until the Justice Department completes investigations related to Powell; if confirmed, Waller is expected to replace dovish board member Miran. If Powell departs entirely, an additional vacancy will open.

Goldman Sachs analysts suggest Waller’s dovish tilt stems from confidence in inflation’s downward trajectory, similar to Powell’s stance. However, the challenge for the new chair will be maintaining cohesion amid uncertain data and committee divisions, which Powell has managed to do.

On balance sheet policy, Waller’s proposal to significantly shrink the Fed’s balance sheet, reintroduce duration risk into markets, and push long-term rates higher while offsetting with rate cuts to keep financial conditions stable, is more divergent from other officials.

According to a Reuters survey, about two-thirds of economists expect the Fed to resume rate cuts after Waller takes over in June.

Market impact: rates, FX, equities, and credit markets

Interest rates: Goldman Sachs’ Brian Bingham notes that the inflation shock from Iran has transmitted to the short end of the dollar, with SFRZ6 volatility exceeding 50 basis points, and terminal rate pricing hitting new lows. The market prices in about a 10% chance of a rate hike at Waller’s first meeting in June, which Bingham considers very low and suggests shorting the tail risk of hikes.

FX: Goldman’s Lexi Kanter says geopolitical factors dominate markets, shifting focus between inflation shocks and recession risks—if the Fed emphasizes inflation, the dollar, AUD, CAD, and real will benefit; if recession fears dominate, the yen could become the strongest currency. G10 traders like Mark Salib are currently long the dollar but have scaled back positions.

Equities: Goldman’s Vickie Chang believes the direct impact of this FOMC is limited, with the key being how uncertainty evolves. Market risk favors lower rates—if hawkish expectations reverse, lower rates could support stocks. On the day of the FOMC, SPX straddle options are priced around 85 basis points; if hawkish dot plots and Iran tensions persist, stocks could decline.

Credit: Goldman’s Usman Omer notes that credit spreads have widened significantly due to macro weakness, stagflation risks, large debt issuance by tech giants, and private credit concerns. High-yield spreads have underperformed investment-grade. He suggests wider spreads may become the new normal, and if growth and inflation trade-offs worsen, credit risk premiums will be further pressured.