The FOMC held rates steady, citing uncertainty stemming from the Iran war as a reason to remain on the sidelines. Nonetheless, as this meeting provided updated forecasts, there was plenty for bond traders to chew on.
The notables.
Full-time employment accounted for the bulk of the losses, with declines widespread across sectors.
- Only Governor Miran dissented in favour of a cut. Governor Waller, who dissented in January, rejoined the majority — a notable shift given his sway among the doves.
- The dot plot held firm: one cut in 2026, one in 2027. The distribution narrowed, with fewer members expecting two or more cuts this year.
- Inflation forecasts were marked up (oil shock)— headline and core PCE both to 2.7% — while the longer-run growth estimate rose to 2.0% on AI productivity optimism.
- During the press conference, Chairman Powell characterized the current level of rates as somewhere between the high end of neutral and slightly restrictive
- The longer-run fed funds rate edged up to 3.1% from 3.0%, signalling a higher neutral rate.
The implications.
- The tone leaned hawkish.
- Higher inflation paired with upgraded growth suggests the bar for a cut is higher than in January.
- Waller’s return to the fold matters. Without the doves’ intellectual leader pushing for easing, a cut requires convincingly softer data.
- Yields backed up 8-10 bps across the curve as bond traders moved to price in a committee on hold for a longer period.
- The Middle East is the wildcard. A prolonged oil shock keeps the Fed pinned; a resolution reopens the door to a second-half move.
