The US Federal Open Market Committee (FOMC) meeting is scheduled for March 17-18 amid a raging war in West Asia, or the Middle East.
Just a month ago, most market participants were almost certain that the US Federal Reserve would cut interest rates at least three times this year, with reductions beginning in the second half.
However, the US-Iran war and concerns over its impact on the growth-inflation trajectory have clouded expectations of rate cuts.
The US Federal Open Market Committee (FOMC) may keep rates unchanged not only in March but throughout the year.
If the US-Iran war drags on for more than two months and keeps crude oil prices above the $100-per-barrel mark, even an interest rate hike later this year cannot be ruled out.
Fed rate cut on cards?
Due to prevailing uncertainty and considering the latest macroeconomic prints, the Fed will most likely leave interest rates unchanged on March 18. Moreover, the chances of a hike are also almost nil because economic growth is not in its best shape.
The fourth quarter numbers of the US economic growth were weaker than expected. US gross domestic product (GDP) saw a modest 0.7% growth in Q4 last year. A poll of economists done by Reuters had forecast GDP growth at 1.4%.
On the inflation front, the US consumer price index increased 0.3% in February. The US Personal Consumption Expenditures (PCE) price index increased 0.3% in January after rising 0.4% in December. Year-on-year, PCE inflation rose by 2.8% after rising 2.9% in December.
The Fed has leg room to keep rates steady at this juncture. However, the war in the Middle East is a factor that has reduced the chances of rate cuts even in the latter part of the year.
“We expect the FOMC to keep rates unchanged in the upcoming meeting. The ongoing geopolitical situation is expected to put upside pressure on inflation, which in turn will further reduce the scope for incremental rate cuts in the year ahead. Of course, much will depend on the longevity of the crisis and its lasting impact,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
Madhavi Arora, Chief Economist for Emkay Global Financial Services, too, has a similar view.
“Rate cut odds for the year are gone. Even stagflation fears are lingering. If the US-Iran war stays protracted, a stagflation issue will be very real,” said Arora.
Should markets brace for a longer pause on interest rates?
At this juncture, it appears that the Fed may keep the rate at the current level for a longer period because of the impact of higher crude prices.
However, a lot will depend on how long the US-Iran war continues. If the war ends sooner, the concerns over inflation will ease, which may pave the way for rate cuts.
Another factor that will determine the interest rate trajectory in the US is the appointment of a new Federal Reserve Chairman after Jerome Powell’s term ends on May 15.
US President Donald Trump has nominated Kevin Warsh to be the next Chairman of the Federal Reserve.
“The new Fed Chairman may not just go by economic reasons. So, I think interest rates won’t remain at a standstill for too long,” said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Group.
Hajra, however, added that the interest rates would depend a bit on how temporary this oil shock is.
“If it gets majorly resolved during the first half of the year, then two rate cuts are possible this year. If it lingers for longer, then at least one. One to two is the base case—at least one, but more likely two,” said Hajra.
Hajra underscored that the US economy is doing better than expected both in terms of growth and inflation. A significant part of that is coming from productivity growth, and that productivity growth is, to a certain extent, AI-induced.
“If you look at the capex plan for 2026, there is huge AI-related capex going to happen. My sense is that despite quite a few headwinds for the US economy, the US will be able to clock better-than-expected outcomes during 2026 in terms of growth,” said Hajra.
As per Debopam Chaudhari, Chief Economist, Piramal Finance, there is little expectation of a rate cut by the Federal Reserve at its March meeting, as policymakers are likely to wait for greater clarity on the early economic impact of the ongoing conflict.
However, Chaudhari believes a June rate cut remains very much on the table to support the U.S. economy amid signs of rising unemployment.
“Lower interest rates could also help ease the pressure on government finances, which are expected to face additional strain from increased military spending related to the conflict. I expect at least an additional 50 bps of rate cuts by the FOMC members in 2026,” said Chaudhari.
There is significant geopolitical and geoeconomic uncertainty at this juncture, creating a complex situation for the US Fed. Things may not move as planned for the central bank, and even the new Fed Chair may find it difficult to cut rates swiftly. On March 18, all eyes will be on the Fed’s projection of inflation and growth.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
