Federal Reserve Sets High Bar Early for Easing, Waller's Rapid Rate Cut Plan May Be Difficult to Achieve

Reuters Finance News — Under multiple pressures including the ongoing Iran conflict pushing oil prices higher, rising inflation expectations, a weak labor market, and uncertain prospects for Trump’s tariff policies, the Federal Reserve concluded its two-day Federal Open Market Committee (FOMC) meeting on March 19, deciding to keep the federal funds rate unchanged at 3.50%-3.75%. The Fed also revised its forecasts for future inflation and interest rates upward, indicating a further tightening of policy expectations.

Federal Reserve Chair Jerome Powell explicitly stated at the post-meeting press conference that oil price shocks are not the only consideration, and slow progress on tariff policies is also a significant factor.

Fed Raises Inflation and Rate Expectations, Significantly Delays Rate Cuts

The Fed’s Summary of Economic Projections (SEP) and “dot plot” show that core PCE inflation expectations have been raised from 2.5% in December to 2.7%. Several officials in the dot plot have ruled out multiple rate cuts this year, with the full-year rate cut expectations reduced from multiple cuts pre-pandemic to just one, and some officials even projecting hikes in 2027.

This adjustment mainly reflects the surge in oil prices caused by the Iran conflict and the rebound in inflation expectations, as well as an assessment of the slow progress on Trump’s tariff policies.

Powell stated at the press conference, “Higher inflation forecasts also reflect the slow progress we see on tariffs.” He added that the Fed is assessing the dual impact of the Iran conflict on prices and employment, emphasizing the current environment is highly uncertain.

Wosh’s Rapid Appointment Would Face Major Resistance

Trump’s nominee for Fed Chair, Kevin Warsh, has expressed a clear preference for significant rate cuts to align with Trump’s long-term demands.

However, the signals from this meeting indicate that the Fed’s internal stance on rate cuts remains cautious or even hawkish. Warsh, as a nominee, holds only 1 of 12 votes and would need to persuade the majority of the committee to support his policy direction. But currently, most officials are raising inflation expectations and tightening the rate path, setting a higher threshold for easing.

North Carolina Republican Senator Thom Tillis has publicly promised to block Warsh’s nomination in the Senate Banking Committee until a criminal investigation into the Fed’s headquarters renovation project involving Powell is thoroughly concluded.

A federal judge last week ruled to quash subpoenas against the Fed, and the Justice Department announced plans to appeal. As long as the investigation continues, Powell will remain chairman, and Warsh’s confirmation process will be hindered, making a significant policy shift unlikely in the short term.

Triple Pressures of Oil Prices, Inflation, and Tariffs Nearly Eliminate Room for Rate Cuts

The Iran conflict has effectively closed the Strait of Hormuz, causing the largest disruption in global oil supply in history, with Brent crude surpassing $100 per barrel, significantly boosting inflation expectations.

The Fed faces dual pressures: energy-driven inflation risks and slowing economic growth. Powell emphasized, “No one knows how large the economic impact will be — it could be bigger, smaller, or even much larger or smaller than expected.”

Slow progress on Trump’s tariff policies also adds to inflationary pressures. Although the Supreme Court recently ruled some tariffs illegal, the government has shifted to re-implement them under other authorities.

Internal Fed views suggest that input-driven inflation from tariffs combined with oil price shocks further compresses the room for easing.

Market Has Fully Abandoned Short-Term Rate Cut Expectations

CME’s FedWatch tool shows that the probability of holding rates steady at this meeting exceeds 99%, with expectations for a single rate cut in the year, delayed until September or October. Market hopes for Fed easing have essentially vanished.

Overall, the energy shock from the Iran conflict, rising inflation expectations, and ongoing tariff impacts are compelling the Fed to adopt a cautious stance this week. If Warsh is quickly appointed, he will face hawkish resistance within the committee, making rapid large-scale rate cuts unlikely. With Powell’s term extended beyond May, the Fed’s policy path is unlikely to shift significantly in the near term.

Investors should closely monitor the Fed’s assessments of inflation and employment, the latest developments in the Middle East, and the progress of Warsh’s nomination, as these factors will directly influence future monetary policy and global asset prices. In the short term, the likelihood of maintaining high interest rates remains very high, supporting a strong dollar, while equities and growth stocks may face increased pressure.

(Editors: Wang Zhiqiang HF013)

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