March 2026 Fed & Rates Call Update

Geopolitical uncertainty and higher energy prices resulting in a delayed end of the rates normalization process 

• FOMC Meeting Recap: Given all of the uncertainty created by the latest Middle East conflict and its potential inflationary impact, combined with a persistently fragile labor market backdrop (characterized by Powell as a "zero employment growth equilibrium"), we believe the aim of the FOMC at the March meeting was to come across as neutral as possible. The FOMC statement had minor tweaks that acknowledged the risks impacting the outlook and projections for 2026 and 2027 median rates were unchanged (implying 1 cut per year, same as it was in December).

• However, upon closer inspection (and as seen in the bar chart below) the interest rate dot forecasts show a convergence towards 1 cut in 2026, with the skew looking more hawkish as the doves pushed their dots up to suggest fewer cuts vs. December's projections. Chair Powell was not trying to sound hawkish, but the press contingent led him in that direction. In particular, when asked about "two-sided guidance on policy" where the Fed is discussing the risk of either cutting or hiking, Powell mentioned it came up again and that "hikes are not off the table." 

• Fed View Update: We have been waiting to see the Fed's reaction to the latest conflict before changing our house view. We still think they needs to cut rates further to finish the normalization process before 2026 is over. To reiterate, we believe the Fed's view on the labor market is too sanguine and too focused on the labor supply side. We also view this conflict as another shock that will negatively impact the economy and corporate America's appetite to expand payrolls. The issue is that oil shocks are initially inflationary before becoming contractionary. Therefore, we anticipate the Fed will fall into the same trap as they did in 2025 (over tariff fears) by pushing back remaining cuts into the 2nd half. Based on our bearish leaning economic view, we still believe that the Fed will cut 3 times to/under neutral in 2026. However, if inflation remains sticky and jobs data stabilizes, the risk is that they only cut 2 times (see diagram below).

• US Rates Forecasts: Our base-case is for the next cut to be in July, assuming Warsh is confirmed before May 15 (and able to chair the June FOMC meeting) and then two more cuts into the end of the year. Given that we pushed back the timing of cuts, we adjusted our fair-value path, making minor adjustments up for each point estimate across the curve into 2027.

Source: MUFG US Macro Strategy