Federal Reserve March Meeting Preview: Will There Be No Rate Cuts This Year?

At 2:00 a.m. Beijing time on March 19, the Federal Reserve will announce its March interest rate decision. Currently, the market widely expects the Fed to keep the policy rate unchanged within the 3.50%-3.75% range. Compared to the January meeting, the macro environment has changed significantly, with escalating Middle East conflicts and the resulting energy price shocks once again becoming the key variables in global macroeconomic pricing.

Over the past year, the core narrative of “de-inflation and rate cuts” has shifted to concerns that supply shocks in oil could trigger stagflation. The latest U.S. inflation and employment data also reinforce this expectation: core PCE has remained around 3% for three consecutive months and shows signs of a short-term rebound; meanwhile, February non-farm payrolls decreased sharply by 92,000, well below the market expectation of a 55,000 increase, and employment data for the first two months were revised downward by 69,000. The unemployment rate unexpectedly rose to 4.44%.

This has led the market to quickly adjust expectations for the Fed’s policy path: two weeks ago, the OIS market still anticipated a 60 basis point cut within the year, but now only about 24 basis points of easing remain priced in, with around a 25% probability of rate hikes being factored in.

The energy price shocks combined with sticky inflation have significantly delayed expectations for Fed rate cuts. The re-pricing of monetary policy expectations has directly driven short-term interest rates higher, with the 2-year U.S. Treasury yield rising above 3.75%, reaching its highest level since late August last year, indicating that markets are reducing their expectations for rate cuts.

For capital markets, this means a phased reversal of the previous expectation of global liquidity easing: firstly, rising U.S. Treasury yields will suppress risk assets, challenging previous trading strategies based on rate cut expectations, such as long-duration bonds and overweighting growth stocks; secondly, the strengthening dollar and increased risk of global capital flows back to the U.S.; and thirdly, energy shocks will reinforce inflation expectations again, forcing the Fed to maintain high interest rates for a longer period. This also heightens the risks in the currently “loud but small” private credit market.

The Fed is now facing a classic stagflation dilemma: risks of rising inflation coexist with risks of slowing growth. The key market debate is whether the Fed will follow historical precedent and ignore energy-driven inflation or shift to a hawkish stance due to five consecutive years of PCE inflation above 2%.