 maintains interest rates in its second policy meeting of the year, as predicted by the market.){kind=link}
On March 18, after a two-day policy meeting, the Fed decided to keep the reference interest rate unchanged at 3.5-3.75%. This move is similar to the January meeting. Last year, the agency reduced interest rates three times.
“Economic activity continues to grow at a solid pace,” the Fed noted. However, inflation is “accelerating” and the labor market has “remained virtually unchanged in recent months.”
In a subsequent press conference, Fed Chairman Jerome Powell began by stating: “We believe the current monetary policy stance is appropriate.” After summarizing the policy decision and the Fed’s latest forecasts, he referred to the conflict in the Middle East.
“The impact of developments in the Middle East on the U.S. economy is still unclear. In the short term, rising energy prices will push overall inflation higher, but it is still too early to assess the scale and duration of potential impacts on the economy,” he said.
Therefore, the agency will “closely monitor risks” with a dual mandate regarding employment and prices.
Powell also mentioned the stance of officials on the monetary policy-setting board. “4-5 people have shifted from expecting two rate cuts to just one. Everyone has their reasons for their choices,” he said.
Overall, Fed officials expect progress in curbing inflation to be achieved by mid-year. “Interest rate forecasts depend on economic developments. If we do not see progress, there will be no rate cuts,” Powell explained.
The Fed forecasts only a 25 basis point (0.25%) rate cut this year and a similar amount in 2027.
Stephen Miran is the only governor who disagreed with this collective decision, wanting a 25 basis point cut. Miran has frequently voted dissentingly in recent meetings.
On the U.S. stock market, the three main indices initially narrowed their declines after the Fed’s announcement. However, selling pressure returned as the U.S. Producer Price Index (PPI) for February and Powell’s remarks raised investor concerns about prolonged inflation. By the end of the session, the S&P 500 lost 1.4%, the Nasdaq Composite fell 1.5%, and the DJIA dropped 1.6% to its lowest level since the beginning of the year.
Meanwhile, global gold prices also fell sharply. By the end of the session on March 18, each ounce dropped by up to 187 USD, to 4,817 USD.
Before the meeting, new signs indicated that the U.S. labor market was weakening and inflation was rising due to oil prices, putting Fed officials in a difficult position. They would have to consider whether to maintain interest rates to avoid worsening inflation or cut rates to support a slowing job market.
A report from the U.S. Department of Labor released earlier this month showed that businesses unexpectedly cut jobs in February. The unemployment rate also ticked up to 4.4%.
The Fed’s meeting took place against the backdrop of the ongoing conflict between the U.S., Israel, and Iran, which has entered its 19th day. The closure of the Strait of Hormuz and attacks on oil and gas infrastructure in several countries have created an energy shock likely to cause consumer prices to soar, reigniting inflation that the Fed has been trying to control since 2022.
Gas prices in the U.S. averaged 3.84 USD per gallon (1.02 USD per liter) on March 18, according to the American Automobile Association (AAA). This level has increased by about 28% since the conflict began.
This meeting is also one of the last two meetings Powell will attend as Chairman. His term will end on May 15. At the end of January, U.S. President Donald Trump nominated former Fed Governor Kevin Warsh to be the next Fed Chairman. This nomination needs to be approved by the U.S. Senate.
