CICC noted that the Federal Reserve kept interest rates unchanged at its March meeting, aligning with market expectations. The dot plot and economic projections indicated upward revisions to inflation forecasts and narrowed room for rate cuts, reflecting an overall cautious policy stance. While Chair Powell expressed that oil price shocks carry significant uncertainty and the economy remains resilient, the firm believes the actual situation is more complex. Tariff and immigration policies have already constrained supply, and combined with oil price shocks, the U.S. economy is entering a stagflation-like phase. Additionally, risks in private credit are emerging, suggesting financial conditions may tighten autonomously. Against this backdrop, the Fed is constrained by persistent inflation in the near term and may maintain its current stance. In the medium term, as demand weakens or financial risks intensify, policymakers could face pressure to pivot toward rate cuts. CICC expects the Fed to hold rates steady in the first half of the year, with any rate cuts likely delayed until the second half. However, if rate cuts are merely a reactive response to deteriorating economic or financial conditions, they may fail to boost market risk appetite.

The meeting took place against the backdrop of surging oil prices due to U.S.-Iran tensions and weak U.S. February nonfarm payroll and Q4 GDP growth data. Markets sought clarity on how the Fed views the impact of rising oil prices and how monetary policy might respond. The rate decision saw an 11-1 vote to maintain the current rate, with Governor Michelle Bowman as the sole dissenter, indicating strong consensus among officials to hold steady this month. The policy statement noted that "the impact of Middle East developments on the U.S. economy remains unclear," suggesting the Fed has not yet factored oil price increases into its decision-making.

The dot plot showed the median projection for 2026 rate cuts remained at one, unchanged from December. Seven officials expect no rate cuts this year, consistent with prior projections. However, the number of officials projecting two or more cuts decreased from eight to five, and the lowest projected year-end policy rate rose from 2.0% to 2.5%. The median estimate for the long-term neutral rate increased from 3.0% to 3.1%, reflecting officials' view that future easing space will be more limited.

In economic projections, the Fed modestly raised inflation and growth forecasts: headline PCE inflation increased from 2.4% to 2.7%, core PCE inflation rose from 2.5% to 2.7%, and real GDP growth was revised up from 2.3% to 2.4%, while the unemployment rate forecast remained at 4.4%. This suggests officials believe oil price shocks primarily drive inflation higher, with limited negative effects on growth and employment.

During the press conference, Chair Powell sought to ease market concerns over rising oil prices, noting that such shocks are typically temporary and do not warrant an overreaction. He emphasized that U.S. economic growth remains solid and does not resemble 1970s-style stagflation. However, he acknowledged that monetary policy must balance two-way risks between inflation and growth, with oil price impacts still highly uncertain. He stated that rate cuts would require clear evidence of inflation easing, adding, "If we don't see that progress, we won't cut rates."

CICC argues the reality may be more complicated than Powell suggests. First, the U.S. economy is entering a stagflation-like phase. Tariff hikes and tighter immigration policies have already constrained supply, and recent oil price shocks will exacerbate supply-side pressures, reinforcing stagflationary traits. While a repeat of the 1970s "Great Stagflation" is unlikely, the direction is clear: risks of rising inflation and declining employment are increasing simultaneously.

Second, risks of autonomous financial tightening are rising. Since February, warning signs have emerged in private credit, including higher redemption rates for private credit products and banks lowering loan valuations for such assets. This reflects a gradual weakening of credit conditions. Although Powell did not address this, CICC believes prolonged opacity, asymmetric information, potential AI disruptions to underlying assets, and a shift from loose to tight macro liquidity collectively suggest a window for private credit risk resolution may have opened. Overall financing conditions are more likely to tighten than ease going forward.

In this context, the Fed's policy space is significantly constrained. Near-term persistence of inflation may lead to a wait-and-see approach, which would do little to alleviate tightening credit markets. Medium-term, inflationary pressures may gradually give way to stagnation, and as aggregate demand weakens and credit risks rise, policymakers could face pressure to cut rates reactively.

CICC concludes that rate hikes this year are unlikely. The current macro environment differs sharply from 2022, when the Fed aggressively tightened policy. Then, the economy was overheating with a strong labor market, warranting monetary tightening to curb demand. Now, growth momentum is weakening, the labor market is cooling, and unemployment is rising, making rate hikes inappropriate. The firm expects the Fed to hold rates steady in H1, with cuts delayed to H2. Rate cuts typically require clear disinflation, further labor market weakening, or more visible financial risks. CICC is more concerned about the latter two scenarios. Thus, any rate cuts would not be bullish, as they would merely respond to economic slowdowns or rising financial risks. Deteriorating growth prospects or credit conditions would be the cause, with rate cuts being the effect. In such cases, monetary easing is unlikely to effectively boost risk appetite.