Fed Decision Preview: Iran War + Inflation Outburst, No Rate Cut Expected This Week, Focus on 4 Key Points
2026-03-18 10:13:39
Amid a complex backdrop of escalating conflict between the US and Israel in the Middle East and Iran, soaring oil prices, rising inflation expectations, mixed signals in the job market, and an uncertain outlook for tariff policy, the Federal Reserve will announce its interest rate decision at 2:00 AM Beijing time this Thursday.
The market has reduced the probability of an interest rate cut to near zero, with futures pricing indicating that the Federal Reserve will not consider easing until at least September or even October, and there may only be one rate cut throughout the year.
Federal Reserve Chairman Jerome Powell and his colleagues will have to navigate a difficult balancing act amid multiple conflicting forces, with a high probability that the federal funds rate will remain in the 3.50%-3.75% range, and no major changes are expected in their economic and interest rate forecasts.
According to the CME Group's FedWatch Tool, the market's probability of a rate cut this week has dropped to near zero.
Before the war broke out, traders expected a 25 basis point rate cut in June, another in September, and possibly even a third depending on the data. However, the conflict in Iran and its impact on oil prices and inflation have completely changed market expectations. Currently, the market is pricing in only one rate cut at the end of the year, with the timing postponed to September or October.
" The Fed itself is almost certain to keep rates unchanged at its March meeting , but any hints from Chairman Powell about the future path of interest rates will be crucial," said BeiChen Lin, senior investment strategist at Russell Investments. She added, "Overall, the U.S. economy remains robust, which means the threshold for further rate cuts is likely to be quite high."
Before the war broke out, the market expected the Federal Reserve to cut interest rates in June, followed by at least one more cut before the end of the year. However, the war with Iran and its impact on oil prices and inflation forced the market to reassess the Fed's path. Fed officials typically tend to ignore short-term oil price shocks, but the current energy crisis is unprecedented in scale, and inflation expectations have risen significantly, making it difficult for the Fed to turn a blind eye.
This meeting will be Powell's penultimate policy meeting as Federal Reserve Chairman, and the market is particularly sensitive to his statements. Powell will need to balance his remarks on inflation, employment, economic growth, and policy path in his post-meeting statement.
In a report, Bank of America's FedWatch team noted, "An April rate cut is almost entirely ruled out, and Powell's ability to guide the market will depend on whether the market perceives his comments as representing committee consensus rather than personal opinions." They added, "Even without this constraint, Powell's job is very difficult."
Former Federal Reserve Vice Chairman Roger Ferguson said he expects the committee to maintain a “cautious” tone on inflation, unemployment, economic growth, and the policy path in its post-meeting statement. He noted, “Everyone is watching what they’ll say, if anything, about the future and how they view changes in the balance of risks.”
In balancing the job market and inflation, Ferguson leans more towards prices. He stated, "I'm more concerned about rising inflation. The Fed has a 2% target, and they've been off target for years." He added, "At some point, people will start to question whether the Fed is really targeting the 2% target, so I'm more worried about that."
Investors will gain insights into the committee's thinking through the Summary of Economic Projections (SEP) and the closely watched "dot plot." The December dot plot indicated only a 25 basis point rate cut this year, maintaining the median estimate of the "neutral rate" at 3%. Given the tense situation in Iran, the market expects no major changes to the March dot plot.
David Kelly, chief global strategist at JPMorgan Asset Management, said: “Judging from their communications, they are likely emphasizing that the Middle East conflict adds further uncertainty to the inflation and employment outlook, but their forecasts may be strikingly similar to those three months ago.”
The Federal Reserve remains shrouded in political shadow. President Trump has been publicly pressuring the Fed, particularly Powell, for years to cut interest rates significantly.
On Monday (March 16), Trump again attacked Powell in front of the media, saying he should have held a special meeting to cut interest rates. He stated, "What better time is there to cut rates now? Even a third grader knows that."
However, Trump's own Justice Department is blocking the confirmation of Kevin Warsh, Powell's successor. The criminal investigation by U.S. Attorney Jeanine Pirro of the District of Columbia into Powell's proposed renovation project at the Federal Reserve headquarters is still ongoing, and North Carolina Republican Senator Thom Tillis has pledged to block Warsh's nomination from proceeding before the Senate Banking Committee until the investigation concludes. This means Powell may remain in office until the end of his term in May.
Overall , the energy shock triggered by the Iran war and rising inflation expectations are forcing the Federal Reserve to maintain a cautious stance at this week's policy meeting. Market hopes for a short-term rate cut have been largely dashed, and the Fed will face a difficult trade-off between upside risks to inflation and slowing economic growth.
Powell's final statements as chairman will have a significant impact on market expectations. If the Federal Reserve maintains its high-interest-rate stance and lowers its rate-cutting expectations, the dollar and Treasury yields may strengthen further, while stocks and growth stocks will face greater pressure.
Investors should pay close attention to Wednesday's FOMC statement, dot plot update, and Powell's press conference to assess the true path of monetary policy.
In the short term, the Federal Reserve is highly likely to maintain interest rates, and the relatively strong dollar is likely to continue. Meanwhile, the protracted risk of the Iran war will continue to inject high uncertainty into global financial markets.
The market has reduced the probability of an interest rate cut to near zero, with futures pricing indicating that the Federal Reserve will not consider easing until at least September or even October, and there may only be one rate cut throughout the year.
Federal Reserve Chairman Jerome Powell and his colleagues will have to navigate a difficult balancing act amid multiple conflicting forces, with a high probability that the federal funds rate will remain in the 3.50%-3.75% range, and no major changes are expected in their economic and interest rate forecasts.
Market expectations: Interest rates will remain unchanged this week, and hopes for short-term easing have been largely dashed.
According to the CME Group's FedWatch Tool, the market's probability of a rate cut this week has dropped to near zero.
Before the war broke out, traders expected a 25 basis point rate cut in June, another in September, and possibly even a third depending on the data. However, the conflict in Iran and its impact on oil prices and inflation have completely changed market expectations. Currently, the market is pricing in only one rate cut at the end of the year, with the timing postponed to September or October.
" The Fed itself is almost certain to keep rates unchanged at its March meeting , but any hints from Chairman Powell about the future path of interest rates will be crucial," said BeiChen Lin, senior investment strategist at Russell Investments. She added, "Overall, the U.S. economy remains robust, which means the threshold for further rate cuts is likely to be quite high."
Before the war broke out, the market expected the Federal Reserve to cut interest rates in June, followed by at least one more cut before the end of the year. However, the war with Iran and its impact on oil prices and inflation forced the market to reassess the Fed's path. Fed officials typically tend to ignore short-term oil price shocks, but the current energy crisis is unprecedented in scale, and inflation expectations have risen significantly, making it difficult for the Fed to turn a blind eye.
Powell's remarks are attracting much attention, adding uncertainty to the countdown to his term.
This meeting will be Powell's penultimate policy meeting as Federal Reserve Chairman, and the market is particularly sensitive to his statements. Powell will need to balance his remarks on inflation, employment, economic growth, and policy path in his post-meeting statement.
In a report, Bank of America's FedWatch team noted, "An April rate cut is almost entirely ruled out, and Powell's ability to guide the market will depend on whether the market perceives his comments as representing committee consensus rather than personal opinions." They added, "Even without this constraint, Powell's job is very difficult."
Former Federal Reserve Vice Chairman Roger Ferguson said he expects the committee to maintain a “cautious” tone on inflation, unemployment, economic growth, and the policy path in its post-meeting statement. He noted, “Everyone is watching what they’ll say, if anything, about the future and how they view changes in the balance of risks.”
In balancing the job market and inflation, Ferguson leans more towards prices. He stated, "I'm more concerned about rising inflation. The Fed has a 2% target, and they've been off target for years." He added, "At some point, people will start to question whether the Fed is really targeting the 2% target, so I'm more worried about that."
The dot plot may maintain a cautious tone, with the market focusing on the Federal Reserve's assessment of the impact of the conflict.
Investors will gain insights into the committee's thinking through the Summary of Economic Projections (SEP) and the closely watched "dot plot." The December dot plot indicated only a 25 basis point rate cut this year, maintaining the median estimate of the "neutral rate" at 3%. Given the tense situation in Iran, the market expects no major changes to the March dot plot.
David Kelly, chief global strategist at JPMorgan Asset Management, said: “Judging from their communications, they are likely emphasizing that the Middle East conflict adds further uncertainty to the inflation and employment outlook, but their forecasts may be strikingly similar to those three months ago.”
Political shadow looms over the Federal Reserve as Trump continues to pressure for interest rate cuts.
The Federal Reserve remains shrouded in political shadow. President Trump has been publicly pressuring the Fed, particularly Powell, for years to cut interest rates significantly.
On Monday (March 16), Trump again attacked Powell in front of the media, saying he should have held a special meeting to cut interest rates. He stated, "What better time is there to cut rates now? Even a third grader knows that."
However, Trump's own Justice Department is blocking the confirmation of Kevin Warsh, Powell's successor. The criminal investigation by U.S. Attorney Jeanine Pirro of the District of Columbia into Powell's proposed renovation project at the Federal Reserve headquarters is still ongoing, and North Carolina Republican Senator Thom Tillis has pledged to block Warsh's nomination from proceeding before the Senate Banking Committee until the investigation concludes. This means Powell may remain in office until the end of his term in May.
Overall , the energy shock triggered by the Iran war and rising inflation expectations are forcing the Federal Reserve to maintain a cautious stance at this week's policy meeting. Market hopes for a short-term rate cut have been largely dashed, and the Fed will face a difficult trade-off between upside risks to inflation and slowing economic growth.
Powell's final statements as chairman will have a significant impact on market expectations. If the Federal Reserve maintains its high-interest-rate stance and lowers its rate-cutting expectations, the dollar and Treasury yields may strengthen further, while stocks and growth stocks will face greater pressure.
Investors should pay close attention to Wednesday's FOMC statement, dot plot update, and Powell's press conference to assess the true path of monetary policy.
In the short term, the Federal Reserve is highly likely to maintain interest rates, and the relatively strong dollar is likely to continue. Meanwhile, the protracted risk of the Iran war will continue to inject high uncertainty into global financial markets.
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