Federal Reserve Decision Amid Middle East Tensions: What Bombshells Will Powell Drop Tonight?

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Source: Caixin

Federal Reserve Chair Jerome Powell will hold his second-to-last Federal Reserve policy meeting tonight. Currently, industry experts widely expect that, faced with the high uncertainty caused by the Middle East conflict, the Fed has no choice but to hold steady this week…

Pricing in the interest rate futures market shows that the likelihood of the Federal Open Market Committee (FOMC) cutting rates at tonight’s meeting is almost zero — the federal funds rate target range is expected to remain at 3.5% to 3.75%, with no rate cuts in the near future. According to the latest futures pricing, policymakers are unlikely to consider easing until at least September, with October being more probable, and even then, only one rate cut is expected this year.

However, within the Fed, hawks and doves are likely to have a heated debate tonight over how the Middle East conflict pressures both sides of its dual mandate, and whether future rate cuts to address slowing economic growth will further exacerbate inflation, which has been above the Fed’s target for five consecutive years.

“Whenever the Fed’s dual mandate becomes conflicting, debates intensify,” said Diane Swonk, Chief Economist at KPMG. “The reality is, considering that U.S. inflation (above 2%) has persisted for five years and the risks of it becoming more entrenched are increasing, the Fed doesn’t have the luxury of ignoring it like other central banks.”

According to the schedule, Fed officials will release a statement after the press conference at 2 a.m. Beijing time on Thursday, followed by a 30-minute press conference by Chair Powell. Since this is a quarterly meeting at the end of each quarter, the latest quarterly economic projections (SEP), including the dot plot, will be released simultaneously with the monetary policy statement, which investors should pay close attention to…

Below is Caixin’s specific preview of tonight’s Fed decision:

1. What changes might be in the post-meeting statement?

Industry experts generally expect the FOMC to mention Iran’s conflict, hinting that it has increased geopolitical uncertainty and U.S. economic risks. Officials may also update their description of the labor market to reflect recent employment data fluctuations. Some Fed observers are curious about how the Fed will characterize inflation after recent energy price increases…

Notably, the January meeting minutes showed several officials supported language acknowledging “risks (to the outlook) are two-sided (uncertain),” meaning they would be open to rate hikes if inflation remains high. Nearly half of economists surveyed by industry media expect this language to be included in tonight’s statement, but weak employment data and uncertainties related to Iran’s conflict could reduce support for rate hikes.

Nick Timiraos, a well-known journalist often called the “New Fed Communications Agency,” wrote earlier this week that if this change is made, it could mark the Fed’s first acknowledgment that the easing cycle may be over.

Currently, some Wall Street investment banks have released their own revised forecasts for the Fed statement.

Goldman Sachs believes the FOMC statement may acknowledge that the Iran war has increased uncertainty about the outlook and could temporarily push up inflation and slow economic activity. The statement might also describe activity growth as “moderate” rather than “robust.” Given the latest employment news, the committee may modestly downgrade its description of the labor market.

Morgan Stanley expects only minor changes to the statement, maintaining the previous language that the unemployment rate is “slightly higher but still low,” rather than “showing some signs of stabilization.” The bank expects the statement to retain its previous forward guidance regarding “the timing and extent of future adjustments to the federal funds rate target range.”

Morgan Stanley also believes the Fed will be prepared to ignore the overall inflation increase caused by high oil prices. The description of inflation remaining “elevated” may stay unchanged, although the statement might mention oil price increases since the January meeting.

2. Will there be multiple dissenting votes tonight?

The January Fed meeting saw two dissenting votes — Fed Governors Michelle Bowman and Christopher Waller, both of whom supported a 25 basis point rate cut.

Currently, many industry insiders expect 2-3 “doves” to oppose a rate cut tonight. Especially since Fed Governor Waller has recently expressed dovish views, increasing the risk of him joining the support for rate cuts.

Waller has said in recent weeks that if strong employment in January diminishes in February, he would support a rate cut — and the recent “negative non-farm payrolls” data suggest that is indeed the case. Mester has called for four rate cuts this year, emphasizing an early move.

Timiraos pointed out that this week, all three of these governors could potentially vote against the rate hike. The key isn’t just the number of votes but that all three are appointed by a president who has publicly called for rate cuts. Since 1988, there has never been a single meeting where all three voted against the policy.

It’s worth noting that votes by Fed governors differ in weight from those by regional Fed presidents, due to organizational structure. Governors have permanent voting rights on the FOMC, while regional presidents rotate annually.

Wall Street banks also expect three governors to oppose a rate hike, supporting a 25 basis point cut, driven by recent labor market data supporting Waller’s dovish stance. Morgan Stanley also expects these three to support a cut.

3. What changes might appear in the dot plot?

The biggest focus of tonight’s Fed decision may be the first dot plot released this year. Investors will get a deeper understanding of Fed officials’ views on interest rates over the coming years.

(December Fed dot plot)

Given the difficulty in forecasting during wartime and the significant economic impact depending on the duration of the Middle East conflict, the uncertainty surrounding the Fed’s economic and rate projections tonight is high. President Trump had suggested the conflict would end soon, within weeks, but that’s hard to verify. Iran has recently threatened to push oil prices above $200 per barrel.

Goldman Sachs expects the latest dot plot to show the median interest rate in 2026 at 3.25% to 3.50%, with rates in 2027, 2028, and beyond likely between 3.00% and 3.25%.

This implies one rate cut in 2026, followed by another in 2027, bringing rates to a neutral level. This is consistent with the December dot plot. Goldman surmises some Fed officials may support early rate cuts due to negative labor market signals, while others may delay cuts due to inflation concerns.

As mentioned earlier, the forecast from tonight’s dot plot is highly uncertain, with individual “dots” likely to be widely dispersed. Wilmington Trust’s Chief Economist Luke Tilley said, “Given the diverse opinions within the committee, the forecast will be very scattered, and it’s very difficult to make precise predictions. All fundamental drivers are changing rapidly, so I expect significant variation in the results.”

Timiraos, known as the “New Fed Communications Agency,” said Tuesday that the dot plot’s projections are likely to dominate the market’s reaction to this week’s Fed meeting. Notably, last December, 12 of 19 Fed officials expected at least one rate cut this year. But just three changing their views could bring the median dot rate down to zero.

4. How will the Fed revise inflation and economic outlooks under Middle East conflict?

The latest Fed dot plot will be included in the Economic Projections Summary (SEP). Officials’ forecasts for inflation, GDP, and unemployment may also offer clues on how they expect oil shocks to influence the economy long-term.

Before this meeting, the Fed’s preferred inflation indicator — core PCE excluding volatile food and energy — accelerated to 3.1% in January, up from 2.6% in April last year.

Timiraos pointed out that if Fed officials raise inflation forecasts, the expectation of rate cuts will become even less tenable, especially for those who believe current rates are near a neutral level that neither stimulates nor hampers growth. Doves might argue that oil shocks could squeeze household spending and curb consumption, reinforcing their case for keeping rate cuts on the table.

Currently, the latest economic outlook may show a downward revision for 2026. Goldman Sachs expects changes including:

Core inflation revised up by 0.2 percentage points to 2.7%;

Overall inflation revised up by 0.6 percentage points to 3.0%;

GDP growth lowered by 0.2 percentage points to 2.1%;

Unemployment rate raised by 0.2 percentage points to 4.6%.

5. What are the key points of Powell’s press conference?

Finally, a major highlight of tonight’s Fed decision will likely be Powell’s remarks on the future path of interest rates.

Industry experts expect Powell to emphasize that officials need more time to observe how long the Iran conflict lasts and assess its potential chain reactions on growth and inflation. He may also highlight the high uncertainty of the current environment and the need for the Fed to maintain policy flexibility.

Bei Chen Lin, Senior Investment Strategist at Russell Investments, said the decision itself is almost certain — to keep rates unchanged in March. But any hints Powell gives about future rate paths will be crucial. Overall, the U.S. economy remains solid, but this means the threshold for further rate cuts could be quite high.

Bank of America’s report states, “Since the market has almost fully priced out a rate cut in April, Powell’s ability to guide the market will depend on how much his comments are perceived as reflecting the committee’s consensus rather than his personal view. Powell’s task tonight will be challenging.”

At the press conference, reporters may also ask whether Powell plans to stay at the Fed after his term ends in May. President Trump previously nominated former Fed Governor Kevin Warsh to succeed Powell, but North Carolina Republican Senator Thom Tillis has blocked Warsh’s confirmation, promising not to support Warsh’s nomination until the Justice Department’s investigation into the Fed concludes.

Last week, a U.S. judge blocked a subpoena from the Justice Department related to renovation costs sent to the Fed in January, and court documents showed Powell felt it necessary to remain on the Fed’s Board at least until legal proceedings end.

Powell has avoided such questions in recent press conferences, and it remains unclear how much he will participate in discussions tonight.