MUFG’s Derek Halpenny expects the FOMC to keep policy options open, with limited changes to the Summary of Economic Projections and no alteration to the median dot profile. MUFG anticipates balanced Fed communication and subdued FX and rates volatility.

Fed caution with conflict-driven inflation risks

"The FOMC will meet this evening and the focus will very much be on the potential implications on inflation stemming from the conflict in the Middle East. This FOMC meeting will also see the Summary of Economic Projections released and the SEPs will likely see limited changes which will help Fed Chair Powell in his messaging that it is too soon to make any conclusions over the impact of the war. The obvious statement he will make is that the longer the conflict lasts the greater the upside risks to energy prices and hence inflation will be."

"We therefore do not expect the FOMC to alter the median dot profile which in December revealed a profile of one rate cut in 2026 and one in 2027. Powell will likely emphasise the fact that conditions now are very different to the last energy price shock in 2022 and that on this occasion the FOMC will have a little more time to assess the backdrop. The monetary stance is one big difference that Powell could highlight with the stance today still restrictive unlike in 2022."

"That said we would also argue that given the errors of 2022-23 for global central banks in general, including the Fed, Powell will likely also highlight the risks and that the Fed will be mindful to the risks of energy price rises seeping into food and services that could then shape wage growth and complicate the medium-term price stability goal. But these will all be merely scenarios at this stage and we suspect a balanced communication with no strong signals on guidance until there has been a bit more time to assess the potential longevity of the conflict."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)