High inflation persists, Federal Reserve "keeps steady"

Why does AI · Powell emphasize that rate cuts need to be based on inflation progress?

【Global Times Report by Ni Hao】 On the early morning of the 19th Beijing time, after the Federal Reserve’s two-day policy meeting, it announced that the federal funds rate target range would remain unchanged at 3.5% to 3.75%. This decision met market expectations and marked the Fed’s second consecutive pause in rate decisions this year. Reuters reported that tensions in the Middle East cast a shadow over the US economic outlook, and investors’ expectations for US economic policies in the coming months have become increasingly uncertain.

Powell: It’s Difficult to Find Sufficient Reasons for Rate Cuts

According to Reuters, after the Fed meeting, the stock market declined, with the S&P 500 dropping 1.4% that day. Meanwhile, Wall Street was digesting a sharp rise in oil prices, with Brent crude approaching $110 per barrel. Mark Spindel, Chief Investment Officer at Potomac River Capital, said, “The current market faces many concerns, filled with uncertainties, including the Fed’s policy direction.”

In this voting session, the 12 voting members of the Federal Open Market Committee (FOMC) ultimately decided to keep the rate range unchanged with an 11:1 vote. Only Fed Governor Stephen M. Miller voted against, advocating for a 25 basis point rate cut.

The Fed’s post-meeting statement specifically highlighted the uncertainties brought by the Middle East situation. Fed Chair Powell also expressed the same view at the press conference, “It’s currently impossible to judge the scope and duration of the potential economic impact.” Powell said, “What I really want to emphasize is that no one knows.”

On March 18 local time, live broadcast of Fed Chair Powell’s speech was played at the New York Stock Exchange trading hall. (Visual China)

According to CNBC, before the US and Israel’s attack on Iran, markets expected two rate cuts this year. However, with rising oil prices and a series of higher inflation data, the market’s expectation of only one rate cut in 2026 has emerged. The report suggests that the Fed is now facing challenges from higher-than-expected inflation, a complex labor market, and Middle East tensions. The much-watched “dot plot” also indicates only one rate cut expected this year, with another in 2027, though the timing remains uncertain.

At the press conference after the meeting, Powell emphasized that further rate cuts depend on progress in controlling inflation. He said, “If we don’t see that progress, we won’t cut rates.” The Wall Street Journal noted that Powell did not show signs of imminent rate cuts during the press conference, instead emphasizing that policymakers might have little room to cut further. Powell described the current Fed stance as closer to a neutral position that neither stimulates nor restrains economic growth, meaning that unless the economy weakens significantly, it will be hard to justify a rate cut.

“Caught in a Bad Situation”

When setting interest rates, the Fed usually needs to balance two goals: price stability and maximum employment. Since 1977, the US Congress has tasked the Fed with a dual mandate to promote maximum employment and maintain price stability to ensure a strong economy. Typically, when prices rise, the Fed raises rates to curb inflation; when unemployment rises, it cuts rates to lower borrowing costs and promote employment. However, Bloomberg reports that rising energy prices due to Middle East tensions and the increase in February’s unemployment rate may cause these two goals to conflict.

“They find themselves in a bad spot,” said William Inglis, a former senior economist at the Fed, to The Wall Street Journal. “Last year, they barely got through the inflation shock, and now it’s happening again, which seems a bit harsh.”

The report notes that even before Middle East tensions escalated, progress in controlling inflation had already stalled. Now, the situation is more worrying. The Fed’s preferred core inflation indicator—the core Personal Consumption Expenditures (PCE) Price Index, which excludes volatile food and energy prices—accelerated to 3.1% in January. Meanwhile, the labor market remains particularly weak in terms of job growth.

The “Business Insider” website states that the Fed’s responsibilities are to achieve maximum employment and price stability. However, ongoing military actions by the US and Israel against Iran are making this dual mandate increasingly difficult to fulfill. It remains unclear how long the inflationary trend caused by geopolitical conflicts will last or what long-term effects it will have on the US economy.

US Economy Under Multiple Pressures

Since the US and Israel launched attacks on Iran last month, oil prices have surged nearly 50%. A survey of 47 economists by the University of Chicago Booth School of Business’s Kuntzler Global Markets Center concluded that if oil remains at $100 per barrel, US economic growth will slow significantly.

“The key issue is the extent and duration of the Hormuz Strait blockade,” said James Hamilton, a professor at UC San Diego and energy market expert. “If the blockade lasts about a month, it will have a huge impact. I think it will lead to a significant downward revision of our growth expectations for this year.”

Additionally, recent US inflation and employment data have raised concerns. The Financial Times reports that the US Bureau of Labor Statistics recently announced that in February, the US lost 92,000 jobs, and US companies have already cut tens of thousands of jobs this year. Meanwhile, rising prices could undermine public confidence in the Fed’s commitment to curb inflation.

At the same time as the Fed announced a pause, new data from the US Treasury on Wednesday showed that US federal debt surpassed a record $39 trillion as of March 17.

According to the Associated Press, the Government Accountability Office explained that rising government debt affects Americans through higher borrowing costs for mortgages and auto loans, reduced corporate investment leading to lower wages, and increased prices for goods and services. Experts warn that the long-term trend of increased borrowing and higher interest payments will force Americans to face tougher economic choices in the future.