【Market Flash】Fed Holds Steady, M-Squared Provides Oil Price, Inflation, and Rate Path Outlook!

What we want you to know:
In March, the Federal Reserve’s FOMC maintained the benchmark interest rate in the 3.50% to 3.75% range, and the dot plot also kept the path of a 1 percentage point cut in 2026. Amid the uncertain Middle East situation, members provided slightly upward revisions to their SEP forecasts for the economy, inflation, and productivity. Financial M Square also offered scenarios on oil prices, inflation expectations, and interest rate developments!

Key points of this article:

2. In this meeting, members voted 11:1 to keep the interest rate unchanged in the 3.50% to 3.75% range, with the statement adding high uncertainty risks related to the Middle East situation.

3. The dot plot still indicates a path of one rate cut in 2026 and 2027, signaling the Fed’s stance remains cautious but leaning toward easing.

4. The SEP slightly raised the 2026 economic growth forecast to 2.4% (from 2.3%), inflation and core inflation to 2.7% (from 2.4%) and 2.7% (from 2.5%), respectively, suggesting members view the US-Israel conflict as a short-term inflation shock. Additionally, they upgraded the US economic growth estimate, reflecting recent productivity gains.

5. During the press conference, Powell maintained a neutral, cautious attitude, stating that the high uncertainty in the Middle East makes precise predictions difficult. The Fed will decide in the next six weeks based on evolving conditions, and when asked about rate hikes, he emphasized that although discussions occurred, it is not the baseline scenario.

1. Fed March Meeting Holds Steady, Focus on Middle East Uncertainty!

In this meeting, the Fed’s voting members agreed 11:1 to keep the benchmark rate in the 3.50% to 3.75% range, with the statement maintaining that economic activity remains solid, and adding that the impact of the Middle East situation on the US economy is highly uncertain. This signals a cautious stance, awaiting further developments. Key points from the statement:

Economic and Inflation Outlook: Steady Economy, Watchful on Middle East Risks

The economic outlook remains largely unchanged from the previous meeting, with activity described as solid. The description of the unemployment rate was updated from “showing signs of stabilization” to “little changed in recent months.” The paragraph on the dual mandate did not reintroduce concerns about increased downside risks to employment, indicating the Fed does not see further weakening in the labor market.

Regarding inflation, the Fed maintains that it remains somewhat elevated and added that the impact of the Middle East situation on US inflation is highly uncertain.

Interest Rate Guidance: No Change in Easing Path

The forward guidance on interest rates remains unchanged, retaining the possibility of additional cuts since September 2025, and the phrase “more cautious assessment of the extent and timing” was reintroduced in December 2025. The message is that the Fed is ending its series of rate cuts but remains inclined toward easing if conditions warrant.

Monetary Policy Approach: Acting According to Future Inflation Trends

Eleven out of twelve members voted to keep the rate in the 3.50% to 3.75% range. The only dissent was from Stephen I. Miran, nominated by Trump, who supported a 25 basis point cut at this meeting (previously supported 50 basis points). Most members, like Powell, indicated they will act based on economic data after observing how the Middle East situation develops, maintaining a cautious stance.

2. Dot Plot Maintains 2026 and 2027 Rate Cuts of 1 Percentage Point Each

The market’s main focus was on the Fed’s interest rate path. The latest March dot plot shows a more concentrated distribution for 2026, with seven members supporting no change, seven supporting a 25 basis point cut, two supporting a 50 basis point cut, and three supporting cuts greater than 50 basis points. The median remains at a 25 basis point cut, in the 3.25% to 3.50% range, but most members have lowered their expectations for the size of future cuts.

For 2027, the rate is expected to stay in the 3.00% to 3.25% range, with a 25 basis point cut forecast. The 2028 median remains at 3.00% to 3.25%, indicating an end to rate cuts. The long-term median rate was slightly raised to 3.125%, and the dot plot still shows an inverted yield curve, reflecting the view that the Middle East situation will have only a short-term impact on inflation, with room for policy easing as inflation slows.

Overall, the 2026–2027 rate cuts are both projected at 25 basis points, signaling the Fed’s continued easing stance. Two notable points:

2. One member projects a rate hike in 2027, which was a focus of questions during the press conference. Powell said discussions about rate hikes occurred but are not the baseline scenario now.
3. The long-term neutral rate was raised again to 3.125%, reflecting the inclusion of productivity growth in the outlook, which could help slow inflation and support economic growth.

Further details will be discussed during the press conference.

3. Slight Upward Revision of US Economic and Inflation Forecasts, Highlighting Productivity Gains!

The Fed’s Summary of Economic Projections (SEP) slightly raised the 2026 GDP forecast to 2.4% (from 2.3%), with the unemployment rate unchanged at 4.4%. Inflation forecasts were also modestly increased: PCE inflation to 2.7% (from 2.4%) and core PCE to 2.7% (from 2.6%). The rate cut of 25 basis points this year indicates members see the war as a short-term inflation shock, with room for easing before 2026. The upward revision of long-term growth and neutral rates to 2% (from 1.8%) and 3.1% (from 3%) respectively, suggests expectations of productivity improvements.

Forecasts for the next three years (2026–2028):

• Slightly higher GDP growth: 2.4% (from 2.3%), 2.3% (from 2.0%), and 2.1% (from 1.9%).
• Long-term growth estimate raised to 2.0% (from 1.8%).
• Unemployment rate roughly unchanged at 4.4%, 4.3%, and 4.2%.
• Slight upward revisions for 2026–2027 PCE inflation: 2.7% (from 2.4%) and 2.2% (from 2.1%).
• Similar upward revisions for core PCE inflation.
• Interest rate path remains unchanged, with a gradual decline to around 3.1%, but the long-term rate was slightly increased to 3.1%.

4. Fed Continues Monthly Treasury Purchases to Support Market Liquidity

Following the October 2025 meeting, when the Fed announced the end of balance sheet runoff and the start of short-term debt purchases in December, the New York Fed has been executing Reserve Management Purchases (RMPs) since December 12, 2025. Details and liquidity impacts:

Liquidity Impact from March 2026 Short-Term Debt Purchases:

According to the NY Fed’s plan, the Fed will begin actively purchasing Treasury securities with maturities under one year, and if needed, securities up to three years. The RMPs will be announced on the 9th business day of each month. Before the April 15 tax deadline, purchases are expected to remain around $40 billion per month to offset non-reserve liabilities.

The latest balance sheet shows US Treasury holdings rising from a low of $4.19 trillion to $4.35 trillion, with an average monthly increase of $43.5 billion from December 2025 to February 2026, supporting the balance sheet’s stabilization.

Liability structure indicates that even with the TGA (Treasury General Account) at a high level of $937.6 billion, reserve balances have begun to rise again, recently surpassing $300 billion, reflecting the expansion of the balance sheet through short-term debt purchases. The Fed did not specify whether the $40 billion monthly purchases will continue after April, so ongoing monitoring is recommended as a key indicator of market liquidity during the rate pause.

Note: The purpose of the Fed’s short-term debt purchases is to maintain ample reserve levels, preventing short-term interest rate volatility. Controlling the policy rate’s upper and lower bounds is a key part of the Fed’s credibility, and if risks to policy rate control emerge, decisive monetary actions are often taken.

5. Powell’s Post-Meeting Press Conference Highlights

[Content not provided; likely to include Powell’s remarks on economic outlook, policy stance, and market expectations.]

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