The Federal Reserve held interest rates unchanged during its March 18, 2026 policy meeting. Compared to January, the latest FOMC statement introduced a new phrase noting uncertainty regarding the impact of Middle East tensions on the U.S. economy, while also observing that the unemployment rate has changed little in recent months—a slight downgrade in confidence from January's assessment that the job market showed signs of stabilization. One official continued to support a 25-basis-point rate cut, while another who previously favored easing shifted to supporting a pause this month. The dot plot revealed a convergence among officials toward fewer rate cuts this year, with seven expecting no cuts, seven projecting one cut, and the rest anticipating more than one reduction. The Summary of Economic Projections raised inflation and GDP forecasts for this year and next.
In his remarks and press conference, Fed Chair Powell expressed optimism about the economy, concerns about employment, and worries over inflation expectations becoming unanchored.
On the economy, Powell remained upbeat. He noted that economic activity has been expanding at a solid pace, with resilient consumer spending and continued business investment, though the housing sector remains weak. He acknowledged that while the U.S. economy is fundamentally sound, the full impact of recent oil price shocks remains uncertain. Overall, higher oil prices are expected to exert downward pressure on consumption and employment while pushing inflation upward.
Regarding employment, Powell voiced underlying concerns. He pointed out that job gains have slowed over the past year, largely due to a decline in labor force growth resulting from reduced immigration and lower labor force participation, even as labor demand has softened. He emphasized that the unemployment rate has barely changed since last September, and with limited growth in both labor demand and supply, the equilibrium level of the job market appears low. Several committee members are particularly concerned about the low absolute level of new job creation.
On inflation, Powell stressed the importance of inflation expectations. He indicated that inflation remains above the Fed's 2% long-term target, with recent increases mainly driven by goods inflation influenced by tariffs. Recent inflation expectation indicators have risen, likely reflecting oil price spikes due to Middle East supply disruptions. Powell noted that the Fed's focus this year is on whether inflation, particularly goods inflation, shows further improvement. As the one-time effects of tariffs gradually dissipate, the Fed hopes to see progress. Historically, energy shocks are often "ignored," but this approach depends on whether inflation expectations remain stable.
Regarding the interest rate path, Powell described the current stance as being at a "slightly restrictive" threshold. He stated that monetary policy is not on a preset course and decisions will remain data-dependent. He clarified that the outlook for rate cuts depends on economic performance; if inflation does not improve, no cuts will occur. Powell described the current situation as challenging, requiring a balance between risks. While a rate hike was discussed as a possibility, most officials do not view it as the base case, though no options are ruled out.
A rate cut this year remains possible, contingent on inflation expectations. The dominant theme of the meeting was uncertainty—how data-dependent policymaking interacts with an unpredictable energy shock leaves the Fed with limited clarity. However, one relatively certain factor is the Fed's need to keep inflation expectations anchored. As long as expectations remain stable, the Fed is likely to look past one-time supply-driven inflation spikes. Powell expressed concern over near-zero growth in private-sector payrolls excluding seasonal distortions and indicated that the Fed is currently at a "slightly restrictive" level, leaving room for eventual rate cuts. The main barrier to easing now is the risk of unanchored inflation expectations.
Attention is turning to the possibility of a shift in rate cut expectations around the potential leadership transition at the Fed. While tight monetary policy is not an ideal tool to address supply-side inflation, persistent oil price increases could affect inflation expectations and delay Fed easing. Compared to Powell, the potential successor is seen as more forward-looking and less data-dependent, suggesting a higher tolerance for supply-driven inflation. If the leadership change occurs smoothly on May 15, a recalibration of rate cut expectations may follow, though timing remains uncertain.
Market reactions included sharp declines in gold and silver, losses in U.S. stocks and bonds, and a modest rebound in the U.S. dollar. The S&P 500, Nasdaq, and Dow Jones fell by 1.36%, 1.46%, and 1.63%, respectively. The 2-year Treasury yield rose 8 basis points to 3.76%, while the 10-year yield increased 6 basis points to 4.26%. The U.S. dollar index edged up 0.21% to 99.78. Brent crude surged 6.30%, while COMEX gold and silver dropped 2.68% and 5.63%, respectively. LME copper fell 3.40%.
Looking ahead, recent U.S.-Iran tensions and rising oil prices have largely erased expectations for Fed rate cuts this year. The simultaneous decline in U.S. equities, bonds, gold, and cryptocurrencies during the FOMC meeting, alongside a stronger dollar, reflects this shift. In a constrained policy environment, the U.S. administration has frequently employed "early-year shock" tactics to create additional policy or market flexibility. The current pattern of elevating oil prices and suppressing rate cut expectations resembles the approach seen before reciprocal tariffs were implemented early last year. However, recent interventions—such as verbal statements from the administration or strategic petroleum reserve sales by Japan whenever oil prices exceed $100 per barrel—suggest an effort to replicate the "shock-and-policy-space" strategy while avoiding a repeat of the 2022 high-oil-price-induced economic downturn.
With midterm elections as the administration's top priority this year, foreign policy is largely an extension of domestic strategy. The timing of heightened tensions with Iran in late February, just before Super Tuesday and the Texas primary, may have been intended to influence voter sentiment. As local elections intensify between May and September, the administration is expected to favor stronger equity markets. Based on the early-year shock logic, risks are likely concentrated in March and April. Two potential scenarios emerge: First, a stalemate in U.S.-Iran relations through March and April could further reduce rate cut expectations or even revive hike speculation, but with U.S. stocks showing resilience. A temporary de-escalation in late April could then lower oil prices, reignite rate cut hopes, and propel equities to new highs between May and September. Second, if a negative feedback loop of "oil prices → inflation → monetary tightening → private credit" triggers a liquidity crisis and sharp stock declines, the Fed may intervene as it did during the March 2023 Silicon Valley Bank episode. Subsequent de-escalation with Iran would be needed to cool oil prices, potentially leading to a V-shaped recovery in equities.
In addition, inflation concerns stemming from U.S.-Iran tensions also affect domestic assets. Caution is advised for domestic equities in March and April, with a potential return to risk-on sentiment between May and August.
Risk warnings include unexpected shifts in U.S. economic fundamentals and policy directions.