War-driven uncertainty clouds rate path – BNY

BNY’s Americas Macro Strategist John Velis expects no policy change at the March FOMC meeting and very limited forward guidance, as the Federal Reserve grapples with higher inflation expectations from the Middle East conflict and a softening labor market. He notes futures have repriced from roughly two cuts to just one by year-end and sees the Fed emphasizing uncertainty.

FOMC seen on prolonged policy hold

“The FOMC meets this week amid rising uncertainty, higher inflation expectations driven by the conflict in the Middle East, and a labor market showing signs of weakness. Even before the U.S. and Israel’s war with Iran started, we weren’t expecting any policy changes at this meeting, and we certainly don’t expect any move now. Nor do we think we’ll receive any meaningful forward guidance at the meeting or the Chair’s press conference afterward.”

“Even though a new quarterly set of dots via the Summary of Economic Projections (SEP) will be published, we don’t think there will be much guidance to take from this exercise either. The Fed entered its media blackout on Friday, February 27, literally the day before hostilities broke out. Since then, we have had no communications from the central bank, leaving Wednesday as the first time we’ll learn of its thinking since the war started.”

“Before the blackout, the general message we took from Fed speakers was that rates were to stay on hold for some time. With the oil shock, this stance is cemented for the time being.”

“… as of February 27, rate expectations had a couple of cuts priced into the curve for year end.”

“Indeed, at the time, December 2026 fed futures saw 61bp of easing. Currently the curve prices in only 25bp, or just one cut. We don’t know how long energy prices will stay elevated, nor how high they could reach, so it’s nearly impossible to quantify the size of the supply shock (via oil prices) or the demand shock (via real incomes).”

“Is the Fed more informed on these questions than the markets? More likely it will highlight the uncertainty resulting from the war and avoid being overly prescriptive about the rate path.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)