Fed Expected to Hold Interest Rates, Iran War Changes Inflation Risk Landscape
The Federal Reserve is expected to maintain its benchmark interest rate on Wednesday, but market attention is instead focused on how the US central bank updates its assessment of the growth outlook, inflation, and policy path after the Iran war changed the economic risk landscape. Reuters reports that policymakers will present their updated views through a policy statement and economic projections (including dot plots), amid uncertainty over the duration of the war and the direction of oil prices.
Energy shocks are a key channel. Reuters notes that oil prices have surpassed US$100 per barrel during this episode, and average gasoline prices in the US have risen to around US$3.79 per gallon, more than 25% higher than before the war. Rising energy costs risk spilling over into other prices, from travel costs to production inputs, which could ultimately reduce consumer spending.
For the Fed, the situation has shifted from a narrative of "stable growth and subdued inflation" to a tug-of-war between potentially upward price pressures and the risk of a slowdown in growth and the labor market. Reuters highlighted concerns that the latest projections could shift toward a "stagflationary" direction, with inflation and unemployment projected higher, while growth is markedly lower. At the same time, the February employment report showed the US economy lost 92,000 jobs, adding to the growth burden.
This shift is also reflected in market expectations. Reuters reports that market participants have trimmed their expectations for an interest rate cut this year; futures markets are now pricing in a quarter-point cut in September, with subsequent cuts seen much further in the future.
Market Impact (in brief):
Dollar (USD): Energy inflation risks and reduced rate cut expectations tend to support the USD, especially as risk-off sentiment strengthens.
Gold: Geopolitical safe-haven support is gaining ground, but upside room could be limited if the USD and yields remain high due to inflation risks.
Equities & Bonds: Equities are sensitive to the "rising energy costs + higher interest rates for longer" scenario, while bonds will reassess their term premium and inflation path.
What market players need to monitor after the FOMC:
Changes in the dot plot and inflation/unemployment projections,
Powell's tone on whether policy risks are now "two-way" (could cut or tighten),
Oil direction (will it stay above US$100 or fall again),
Consumer response to energy prices (indicating weakening spending).(CP)
Source: Newsmaker.id
