Powell to highlight 'near-term upside' inflation risk as markets brace for hawkish adjustment

Unlike in Europe, we’ve seen a far more measured repricing in rate expectations across the Atlantic. The US is a net exporter of oil, so not only is it less exposed to imported oil inflation, but the jump in global energy prices should provide a boost to America’s terms of trade and real GDP growth. For that reason, we think that the Fed is under absolutely no pressure to make any quick judgement calls on the path ahead for rates. US natural gas prices have actually remained remarkably stable since 1st March, while the appreciation in the dollar should act to partly protect households and businesses from rising energy costs.

The Fed also has to contend with problems closer to home, notably the continued cooling in the US jobs market. The February nonfarm payrolls report indicated that another 92k net jobs were shed last month, while the six month average now sits at effectively zero following the recent sharp downward revisions to the BLS data. Chair Powell has sounded balanced on the labour market of late, rather than downright pessimistic, but the Fed will likely look at recent data with caution. One could argue that this slowdown has much to do with the immigration crackdown and the impact of AI investment, but while the former seems fairly clear, the evidence on the latter is inconclusive.

While FOMC officials had very little time to comment on the Iran situation prior to the usual blackout period, communications that we did receive were resoundingly of the view that it was too early to make a call on the impact of the war on the US economy. We don’t think that Powell will deviate from this interpretation too much, although he will likely highlight the near-term upside risks to inflation posed by the Iran war, indicating that the Fed is not in a rush to ease policy further.

While this may be perceived as hawkish by markets, we think that he will ultimately strike a non-committal, “wait and see” stance. The other focus for markets will be the Fed’s updated interest rate projections, which come at somewhat of an awkward time given the uncertainty abroad. Market participants will be bracing for a hawkish adjustment to the dot plot, and the risk is clearly skewed towards less cuts than more relative to the December projections.

While we expect the 2026 median dot to remain unchanged at 3.4% (i.e. in line with just one cut), we see a possibility that this could be shifted upwards to show no change - at the very least, we think that a handful of members will see a higher fed funds rate than before. Again, this could be seen by markets as bullish for the dollar, although remarks from Powell that the war has created considerable uncertainty for the bank’s forecasts would likely act to temper the FX reaction.