Observations from Fed Statement, Forecasts and Press Conference

March 18, 2026

The press release reads very much like the one seven weeks earlier. Again and as was very widely expected, the federal funds rate was left unchanged at 3.50-3.75%. The insertion of a new sentence in paragraph two stating “the implications of developments in the Middle East for the U.S. economy are uncertain” merely states the obvious that elevated uncertainty has become even more so. A more interesting modification was that Governor Christopher Waller’s vote shifted from a dissent in late January that had favored a 25-basis point interest rate cut to agreeing this time with the overwhelming majority to leave the rate as is. In an 11-1 vote, consequently, Governor Stephen Miran’s wish to cut by 25 bps was today’s only dissent.

Macroeconomic forecasts this time are not very different from the previous set taken in December. Projected GDP growth was bumped higher to 2.4% in 2026, 2.3% for 2027, 2.1% for 2028 and 2.0% in the longer run (assuming no further shocks and an appropriate monetary policy). Juxtaposed against an unchanged slate of unemployment forecasts except for a 0.1 percentage point rise for 2027, higher growth presumably reflects the faster productivity gains seen in the post-Covid years. PCE inflation this year is now thought likely to rise 2.7%, three tenths of a ppt faster than in the December forecast but to then ease next year and still converge on the 2.0% target in 2028 just as was thought back in December. The end-year projected federal funds rate median levels match those contained in the December forecasts, but the equilibrium longer run interest rate level was bumped up 0.1 ppt to 3.1%, again presumably in recognition of the faster longer run pace of rise in real GDP.

In his opening remarks and answers to assorted questions, Powell conveyed a view that the outlooks for both legal mandates (steady 2.0% inflation and maximum employment) carry significant risks of being missed, but he didn’t prioritize that either excessive inflation or a sub-optimal labor market was more likely to happen. The war in the Middle East adds a whole new layer of uncertainty to the future U.S. economic performance regarding each of the Fed two mandated goals, especially at this early stage just over two and a half days into the conflict. How quickly the war ends will matter, but so too will be the matter of how quickly and completely this latest shock takes to play out after the war has ended. He hopes that a great deal more is known about these two mysteries when the FOMC next convenes six weeks from now.

As with the case of tariffs, the war shock in theory should have a time-limited effect on inflation, assuming that an upward bump in expected longer term inflation doesn’t occur. That’s why most Fed officials are viewing the failure so far for about five years and counting to return fully to 2.0% inflation as an objective of rising urgency. The longer actual inflation exceeds target, the more likely workers, businessmen and consumers will feel compelled to ratchet higher expectations of inflation years from the present.

Powell did acknowledge that the recent effectively flat line of private employment growth has warranted considerable scrutiny. The best explanation for the lack of rising jobs but continuing GDP growth is that labor supply is not growing either due to a deliberative change in U.S. immigration policy. Other measures of labor market performance will continue to be monitored closely to keep making sure that the lack of job creation is not a broader indication of an unintended sub-optimal performance.

Tags: FOMC Review

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on Wednesday, March 18th, 2026 at 2:23 pm and is filed under Central Bank Watch.
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