UOB’s Alvin Liew notes that the March FOMC minutes show a divided Federal Reserve but with most officials more worried about US labor markets than inflation, implying a tilt toward future rate cuts. UOB keeps its forecast for a pause through April, then two cuts in June and 3Q 2026, taking the Fed Funds Target Rate to 3.25% by year-end.

Fed split but leaning toward cuts

"The minutes showed that Fed officials were mixed over the future direction of interest rates and prioritized to stay “nimble” as they weighed the impacts/uncertainties due to the war in the Middle East."

"Many Fed officials continued to view further cuts appropriate if inflation declines in line with their expectations, while some said they delayed the timing of the cuts due to recent inflation readings. Some highlighted there was a strong case for wanting a two-sided description in the policy statement, implying putting the possibility of rate hikes on the table."

"The “vast majority” of Fed officials agreed on elevated upside inflation risks and downside employment risks, while the “majority” flagged the situation in Middle East for magnifying those risks. The minutes showed that most participants are concerned that the prolonged conflict could weaken labor markets and prompt rate cuts while many are worried persistently higher oil prices could keep inflation elevated and potentially require rate hikes to anchor expectations."

"Staying with our view of a near-term pause before resuming with 2 more cuts in 2026. We continue to expect a period of pause (including the Apr FOMC) followed by two rate reductions in Jun and 3Q 26, with the expectations for weakness in the labour market to emerge in the months ahead."

"This would bring the terminal FFTR to 3.25% by year-end 2026, consistent with our view of a gradual normalization path. That said, investors will be on heightened lookout for risk of either further delay in Fed rate cut timing or even increasing difficulty for the Fed to cut in the second half of the year, if energy prices rise substantially on a prolonged basis due to spillover from the Middle East conflict."

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