Key Highlights 

  • The Fed held rates at 3.5%–3.75% for a second consecutive meeting, signalling deep uncertainty over the Iran conflict's economic implications. 
  • Market expectations have repriced from two cuts anticipated before the conflict to, at best, one in late 2026. 
  • The FOMC revised its 2026 core PCE inflation forecast upward to 2.7%, against a prior estimate of 2.4%.  
  • Global equity markets fell sharply, Japan's Nikkei dropped over 3%, India's Nifty declined 2%, as markets dialled back rate-cut expectations entirely for 2026.  

 

A Policy Framework Under Siege 

The Federal Reserve entered its March meeting navigating the sharpest geopolitical shock to global energy markets in over a decade. Policymakers left the benchmark rate unchanged for a second straight meeting, keeping it near 3.6%, while stating that the implications of developments in the Middle East for the US economy remain uncertain. 

Fed officials revised inflation projections higher for 2026 but expect prices to ease sharply the following year, a projection Chair Powell acknowledged carries limited conviction, noting that the trajectory remains uncertain. 

For investors, this ambiguity is the central risk variable. 

 

The Oil Transmission and Stagflation Threat 

Higher energy prices are rippling through transportation costs, food prices, and utilities, with economists warning that the Fed now faces a dilemma. Cutting rates to support the labour market could accelerate inflation, while holding rates risks further labour market deterioration. 

Baseline expectations have shifted toward only one potential rate cut in 2026, likely late in the year, while it remains plausible that no cuts are delivered at all. Some scenarios even consider the possibility of rate hikes later in 2026 if inflation pressures intensify. 

Powell acknowledged that job creation has slowed significantly, while near-term inflation expectations have risen, largely reflecting the oil price surge driven by supply disruptions. 

 

Investor Implications: Repositioning Under Uncertainty 

The repricing of rate expectations carries direct consequences across asset classes. 

Markets have dialled back rate-cut expectations for 2026 and pushed easing further into 2027, indicating that inflation risks linked to the oil shock could disrupt the expected policy easing cycle. 

The policy uncertainty creates a supportive backdrop for precious metals, as investors seek hedges against inflation and macro instability. At the same time, the US dollar faces competing forces between yield support and uncertainty-driven pressures. 

Rate-sensitive emerging markets may experience intermittent headwinds as expectations for monetary easing are deferred. This reinforces the need to monitor crude oil prices closely, given their central role in shaping inflation trajectories. 

Duration risk in fixed income portfolios warrants reassessment, while equity valuations premised on swift monetary easing appear increasingly vulnerable. 

 

FAQs 

  1. Why is the Fed holding rates despite a weakening labour market? 

The Fed faces a policy trade-off. Cutting rates to support employment risks fuelling inflation already elevated by the oil shock, while holding rates risks further weakening labour market conditions. The committee is prioritising flexibility until the economic impact of the conflict becomes clearer. 

  1. How many rate cuts are now expected in 2026? 

Market expectations have shifted from two cuts before the conflict to, at most, one. Some projections suggest the possibility of no cuts at all during the year. 

  1. What does this mean for equity and bond markets? 

Bond yields have adjusted to reflect higher-for-longer rate expectations, while equities have come under pressure as inflation risks persist and the timeline for monetary easing extends. 

  1. Could the Fed raise rates instead? 

While not the base case, the possibility has been raised. If inflation pressures from elevated energy prices prove sustained, policymakers may need to consider tightening again, reversing the expected easing trajectory.