The Federal Reserve maintains interest rates as expected; the dot plot indicates there may be one more rate cut this year.

At 2 a.m. Beijing time on Thursday, against the backdrop of ongoing conflicts in the Middle East and soaring oil prices, the Federal Reserve’s Federal Open Market Committee (FOMC) released its latest interest rate decision. In line with market expectations, it kept the federal funds rate target range unchanged at 3.5% to 3.75%, marking the second consecutive meeting without a change.

Following the rate announcement, the three major U.S. stock indices rose slightly, spot gold gained $10 in the short term, and the dollar index remained relatively stable.

The FOMC statement showed that the committee approved the rate decision with an 11-1 vote. The committee’s outlook on the economy remained largely unchanged, but it slightly raised its expectations for economic growth and inflation for 2026.

Despite ongoing uncertainties, officials reiterated that multiple rate cuts could still occur in the future. The closely watched “dot plot” indicates that most members expect one rate cut this year and another in 2027, though specific timing remains unclear.

Among the 19 FOMC members, 7 expect no rate cuts this year, an increase of one from the December forecast last year. While there is significant divergence in projections for the interest rate path over the coming years, the median forecast suggests further rate cuts in 2027, with the federal funds rate stabilizing around a long-term level of approximately 3.1%.

The statement also mentioned that the conflict in Iran, which erupted three weeks ago, has added additional uncertainty. The conflict and its impact on the Strait of Hormuz have disrupted global oil markets and may keep inflation above the Fed’s 2% target. The statement noted, “The development of the Middle East situation remains uncertain in its economic impact.”

Before the policy meeting, international oil prices surged from below $80 per barrel to $108, with U.S. gasoline prices rising in tandem. Meanwhile, even before the conflict erupted, recent data showed wholesale inflation (PPI) had increased beyond expectations.

The statement revealed that Federal Reserve Governor Stephen Milkan again voted against the decision, advocating for a 25 basis point cut amid rising concerns about worsening employment conditions. Previously, in January, Christopher Waller, who also supported a rate cut, voted to keep rates unchanged this time.

Notably, no policymakers expect a rate hike this year, though one official anticipates a possible increase in 2027.

Before the conflict, markets had expected two rate cuts this year, with a small chance of a third. However, with rising oil prices and a series of strong inflation data (which had already appeared before the energy shock), markets now expect at most one rate cut in 2026.

In the latest economic projections, Fed officials expect GDP growth of 2.4% this year, slightly higher than the December forecast of 2.3%. For 2027, economic growth is projected at 2.3%, an upward revision of 0.3 percentage points from previous estimates.

Officials also raised their inflation outlook for this year, expecting the Personal Consumption Expenditures (PCE) Price Index (including overall and core) to be 2.7%. However, they believe that as tariffs and war impacts gradually diminish, inflation will return to near the 2% target in the coming years. Despite recent soft non-farm payroll data, policymakers still expect the unemployment rate to be 4.4% by year-end.

The Fed’s decision to hold steady also occurs amid complex political circumstances. U.S. President Trump has continued to pressure Powell and his colleagues to cut rates. Earlier this week, Trump criticized Powell for not holding a special meeting to implement easing, despite high inflation and uncertainties caused by the war.

On the other hand, this Thursday’s meeting, chaired by Powell, may be his second-to-last during his term. His term ends in May, and Trump has nominated former Fed Governor Kevin Woeh as his successor. Woeh previously favored lower rates but has not publicly stated his latest policy stance.

Adding further complexity are judicial factors. U.S. Department of Justice officials, including Washington D.C. federal prosecutor Jenny Piro, have issued subpoenas to Powell, requesting evidence related to the Fed’s multi-billion dollar headquarters renovation. Powell has refused to cooperate, accusing Trump of using the subpoena to pressure the Fed into cutting rates. A judge supported Powell, dismissing the subpoena and stating that the move aimed to “harass and pressure Powell.”

However, Piro has indicated she will appeal. Meanwhile, Republican Senator Tom Tilles said he would block Woeh’s nomination in the Senate Banking Committee until the Powell controversy is resolved. If the lawsuit continues past May, Powell may remain in office until Woeh is confirmed.

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(Source: Cailian Press)