Fed Holds Off on Rate Cuts for Second Consecutive
The world's largest central bank's continued pause in its rate-cutting cycle signifies a structural turning point, reversing the easing trend that began in late 2025, and impacting global financial markets, exchange rates, and emerging economies. The uncertainty surrounding the Middle East situation, and the risk of rekindling inflationary pressures through energy prices, fundamentally constrains the FRB's policy decisions.
── Understand in 3 points ─────────
- • The FRB decided to keep the policy interest rate (FF rate) unchanged at the FOMC meeting on March 18, 2026.
- • This marks the second consecutive meeting where a rate cut was postponed; the rate was also kept unchanged at the previous meeting in January 2026.
- • FRB Chair Powell stated that "the impact of the Middle East situation on the U.S. economy is uncertain."
── NOW PATTERN ─────────
The FRB's decision to postpone rate cuts reflects a situation where the "path dependency" of the fight against inflation is reinforced by geopolitical risks, making a return to monetary easing structurally difficult. The "chain of contagion" — Middle East situation → crude oil prices → inflation → monetary policy — continues to erode policy flexibility.
── Probabilities and Responses ──────
• Base case 55% — CPI year-over-year decelerates month-over-month for three consecutive months. The stalemate in the Middle East continues. FOMC members' dot plot suggests two rate cuts within the year. Increased frequency of the term "progress" in Powell's press conferences.
• Bull case 20% — Substantial agreement on an Israel-Hamas ceasefire. Reports of renewed Iran nuclear negotiations. Crude oil prices fall below $75. CPI year-over-year clearly drops below 2.5%. Increased dovish remarks in FOMC members' speeches.
• Bear case 25% — Reports of military conflict between Israel and Iran. Crude oil prices exceed $95. CPI month-over-month acceleration for two consecutive months. Some FOMC members mention rate hikes. Sharp decline in regional bank stock prices. VIX (fear index) exceeds 30.
📡 THE SIGNAL — What Happened
Why it matters: The world's largest central bank's continued pause in its rate-cutting cycle signifies a structural turning point, reversing the easing trend that began in late 2025, and impacting global financial markets, exchange rates, and emerging economies. The uncertainty surrounding the Middle East situation, and the risk of rekindling inflationary pressures through energy prices, fundamentally constrains the FRB's policy decisions.
- Policy Decision — The FRB decided to keep the policy interest rate (FF rate) unchanged at the FOMC meeting on March 18, 2026.
- Policy Decision — This marks the second consecutive meeting where a rate cut was postponed; the rate was also kept unchanged at the previous meeting in January 2026.
- Statement — FRB Chair Powell stated that "the impact of the Middle East situation on the U.S. economy is uncertain."
- Statement — Chair Powell indicated his intention to closely monitor future economic trends, re-emphasizing a data-dependent approach.
- Background/Inflation — Caution against a re-acceleration of inflation is considered the primary reason for the FRB's cautious stance.
- Geopolitics — Concerns are rising that escalating tensions in the Middle East could impact the U.S. economy through upward pressure on energy prices.
- Interest Rate Level — The current FF rate target range is maintained at 4.25-4.50% (level after the December 2025 rate cut).
- Market Reaction — Market expectations for a resumption of rate cuts in the first half of 2026 have receded, and the outlook for the number of rate cuts this year has narrowed.
- Economic Indicators — U.S. CPI (Consumer Price Index) has hovered in the 2.8-3.0% range year-over-year through early 2026, still exceeding the FRB's 2% target.
- Employment — The U.S. labor market remains robust, with the unemployment rate stable around 4.0%.
- Energy — Crude oil prices (WTI) are trading in the upper $80s per barrel due to the Middle East risk premium.
- Exchange Rate — The USD/JPY exchange rate has shifted towards a weaker yen and stronger dollar following the FRB's postponement of rate cuts, trading in the 150 yen range.
To understand the background of the FRB's decision to postpone rate cuts for two consecutive meetings, it is necessary to review the broader context of U.S. monetary policy since 2022.
In March 2022, the FRB initiated a rate-hiking cycle from zero interest rates in response to the post-pandemic surge in inflation. Policy rates were raised at a historic pace of 525 basis points in just 16 months, reaching a 22-year high of 5.25-5.50% in July 2023. During this period, inflation gradually began to decline after peaking at 9.1% year-over-year in June 2022 (a 40-year high).
From July 2023, the FRB kept interest rates unchanged for approximately one year, establishing a "period of patience" to confirm a sustained decline in inflation. Then, in September 2024, it finally shifted to a rate-cutting cycle, initiating an easing phase with a substantial 50 basis point cut. Subsequent cuts of 25 basis points each in November and December brought the FF rate down to 4.25-4.50%.
However, this easing cycle entered a temporary pause as early as January 2025. This was due to a slowdown in the pace of inflation decline, particularly the sticky nature of service sector inflation. Throughout 2025, the FRB maintained a "data-dependent" stance, adopting an irregular easing pattern of alternating rate cuts and pauses.
From late 2025 to early 2026, a new variable emerged: escalating tensions in the Middle East. In addition to the prolonged Israel-Gaza conflict, geopolitical tensions around Iran heightened, rekindling concerns about energy supplies via the Strait of Hormuz. Crude oil prices began an upward trend from late 2025, reaching the upper $80s per barrel in early 2026. This rise in energy prices brought widespread upward pressure on prices through transportation and production costs, beginning to materialize the risk of a "second wave of inflation" that the FRB most feared.
This scenario is reminiscent of the "stop-and-go" monetary policy of the 1970s. At that time, the FRB (under Chair Burns) prematurely shifted to easing when inflation began to decline, ultimately failing to eradicate inflation. With the two oil shocks of 1973 and 1979, inflation became uncontrollable. It is still fresh in memory that Chair Powell, in his 2022 Jackson Hole speech, referred to "lessons from history" and declared that the mistakes of the 1970s would not be repeated.
The dilemma currently faced by the Powell FRB lies precisely between these historical lessons and real-world political and economic pressures. The Trump administration (returning in January 2025) has prioritized promoting economic growth and job creation, intensifying pressure on the FRB for rate cuts. Meanwhile, strengthened tariff policies and expanded fiscal spending are acting to increase inflationary pressures. The FRB faces the dual challenge of maintaining political independence while safeguarding the credibility of its inflation target.
Furthermore, the global context is also crucial. The European Central Bank (ECB) and the Bank of Japan are in different policy cycles, and policy divergences among major central banks are mutually influencing each other through the foreign exchange market. A strong dollar, in particular, increases the debt burden of emerging economies and heightens capital outflow pressures. The FRB's every move continues to literally dictate the direction of the global economy.
The Middle East situation, an exogenous variable beyond the FRB's control, is making the "last mile" of monetary policy — the final stage of converging inflation to 2% — significantly difficult. This is the essence of the situation Chair Powell described as "uncertain," and the true reason why the FRB cannot act.
The delta: The FRB's decision to postpone rate cuts for two consecutive meetings suggests that the rate-cutting cycle, which began in September 2024, is transitioning from a de facto "temporary pause" to a "prolonged halt." What has fundamentally changed is that the uncertainty in the Middle East has materialized the risk of a "second wave" of inflation through energy prices. Chair Powell's explicit mention of the Middle East situation signifies that the FRB has formally recognized uncontrollable geopolitical risks as a key variable in monetary policy, fundamentally increasing the uncertainty of future policy paths.
🔍 BETWEEN THE LINES — What the News Isn't Saying
Powell's explicit mention of the Middle East situation is a strategic move to signal to the market that the "true culprit" of inflation is an exogenous variable—energy—rather than domestic factors (wages, housing costs). The FRB's true sentiment is "we want to cut rates, but we can't," and by attributing the responsibility for the pause to geopolitical risks, an intention to avoid political criticism is apparent. Furthermore, it is highly probable that, with Powell's term ending in May 2026, he is performing a "neutral act" to avoid appearing overly hawkish or dovish, considering his relationship with the White House, which influences his successor's appointment. The "non-decision" of keeping rates unchanged is, for Powell, currently the most politically safe option.
NOW PATTERN
Path Dependency × Coordination Failure × Chain of Contagion
The FRB's decision to postpone rate cuts reflects a situation where the "path dependency" of the fight against inflation is reinforced by geopolitical risks, making a return to monetary easing structurally difficult. The "chain of contagion" — Middle East situation → crude oil prices → inflation → monetary policy — continues to erode policy flexibility.
Intersection of Dynamics
The three dynamics of path dependency, coordination failure, and chain of contagion are deeply intertwined, compressing the FRB's policy space from three directions.
Path dependency forms the structural constraint that makes the FRB "want to act but unable to," coordination failure closes off the possibility of externally lifting that constraint, and the chain of contagion acts as a risk amplification device. Specifically, the FRB cannot abandon its cautious stance due to past errors in inflation judgment (path dependency), must address inflationary pressures solely through monetary policy because coordination with fiscal authorities and the international community is not functioning (coordination failure), and the chain of contagion from the Middle East situation further increases this burden.
At the intersection of these three dynamics stands Chair Powell himself. Powell must simultaneously contend with the failure of his "transitory inflation" statement in 2021 (the origin of path dependency), strained relations with the Trump administration (a symbol of coordination failure), and the uncontrollable exogenous shock from the Middle East (the entry point of the chain of contagion).
The most dangerous scenario is when all three dynamics worsen simultaneously. This would be a negative spiral: rapid deterioration of the Middle East situation (acceleration of the chain of contagion) → crude oil exceeding $100 → surging inflation → FRB forced to raise rates (extreme manifestation of path dependency) → economic recession → fiscal stimulus needed but difficult due to expanding deficits (deepening of coordination failure). While the probability of this worst-case scenario is low at present, the intersection of these three dynamics undoubtedly structurally increases uncertainty. The FRB's "pause" is both an optimal response under these complex constraints and a postponement of the problem, possessing a dual nature.
📚 PATTERN HISTORY
1973-1974: The First Oil Shock and the Burns FRB's Policy Response
Middle East geopolitical risk → Soaring crude oil prices → Surging inflation → FRB's policy dilemma
Structural Similarity to Today: Chair Arthur Burns, fearing recession, did not tighten sufficiently, ultimately leading to stagflation. When a central bank takes a half-hearted approach to an exogenous energy shock, there is a risk of inflation becoming structural.
1979-1982: The Volcker Shock and the Second Oil Shock
Legacy of insufficient response by predecessors → Drastic tightening to restore credibility → Deep recession
Structural Similarity to Today: Chair Volcker raised the FF rate to 20% to conquer inflation, but unemployment exceeded 10%. Once inflation expectations become unanchored, restoring them incurs immense economic costs. This is the fundamental reason why Powell prefers a "precautionary pause."
1994-1995: The Greenspan FRB's Precautionary Rate Hikes
Preemptive tightening at the nascent stage of inflation → Temporary market disruption → Soft landing achieved
Structural Similarity to Today: Greenspan began raising rates before inflation actually accelerated, ultimately achieving a soft landing. This is one of the few successful examples where "precautionary action" paid off, and it represents Powell's ideal scenario, but a key difference from today is that geopolitical risks were low at the time.
2018-2019: The Powell FRB's Rate Hikes → Abrupt Rate Cuts
Excessive tightening → Market crash → Policy reversal → Doubts about credibility
Structural Similarity to Today: Powell continued rate hikes on "autopilot" in late 2018, leading to a sharp decline in the stock market. He abruptly reversed course with rate cuts in 2019, but faced criticism that the FRB was providing a "put option" to the market. This experience ingrained in Powell the lesson that "abrupt policy reversals are costly."
2021-2022: Failure of "Transitory Inflation" Judgment and Rapid Rate Hikes
Underestimation of inflation → Delayed policy response → Erosion of credibility → Overcorrection
Structural Similarity to Today: The Powell FRB judged inflation in 2021 as "transitory," leading to a delayed response. Consequently, it was forced into a historic pace of rate hikes starting in 2022. This experience is the direct cause of the FRB's current extreme caution, embedding an organizational bias to "choose overestimation over underestimation."
Patterns Revealed by History
These five historical precedents illustrate a structural pattern: "central banks conduct asymmetric risk assessments regarding inflation." The costs of underestimating inflation (erosion of credibility, stagflation, and subsequent drastic tightening) significantly outweigh the costs of overestimating it (unnecessary economic suppression). This asymmetry biases the FRB towards a hawkish stance, and particularly when exogenous geopolitical shocks are present, "inaction" becomes a rational choice.
In Powell's personal career, the two experiences of "overdoing it" in 2018 and "being too late" in 2021 dictate his current "wait until the data is clear" approach. However, history also shows that a "waiting" strategy carries risks. Precautionary actions like Greenspan's in 1994 succeed only when the external environment is relatively stable. With the uncontrollable variable of the Middle East present today, the FRB's "waiting" strategy relies on an optimistic assumption that the situation will improve, raising questions about its preparedness should that assumption fail.
🔮 WHAT'S NEXT
The FRB postpones rate cuts throughout the first half of 2026 and resumes a 0.25% rate cut at the June or July 2026 FOMC meeting. The Middle East situation remains tense but does not escalate to large-scale military conflict or a blockade of the Strait of Hormuz, with crude oil prices trading in the $80-90 range. U.S. CPI year-over-year gradually declines within the 2.5-3.0% range, but convergence to the FRB's 2% target is not achieved within the year. In this scenario, the FRB implements a total of two rate cuts (50 basis points in total) for the entire year 2026, with the FF rate ending the year at 3.75-4.00%. The U.S. economy grows at a pace slightly below its potential growth rate (approx. 2%), but a recession is avoided. The labor market gradually cools, but the unemployment rate does not exceed 4.5%. USD/JPY trades in the 145-155 yen range, and the stock market continues to move within a range. For market participants, this becomes a "boring but stable" environment, with volatility decreasing, but stress on commercial real estate and small and medium-sized enterprises gradually accumulates due to the prolonged high-interest rate environment. For the FRB, it is a "barely successful" outcome, and the appointment of Powell's successor after his term ends (May 2026) becomes the next focal point.
Investment/Action Implications: CPI year-over-year decelerates month-over-month for three consecutive months. The stalemate in the Middle East continues. FOMC members' dot plot suggests two rate cuts within the year. Increased frequency of the term "progress" in Powell's press conferences.
The Middle East situation unexpectedly stabilizes. A ceasefire agreement between Israel and Hamas begins to function effectively, and the risk of direct military conflict with Iran significantly decreases. Crude oil prices fall to the low $70s, resolving energy-driven inflationary pressures. As a result, CPI rapidly declines, and the FRB resumes rate cuts as early as May 2026. In this case, the FRB implements 3-4 rate cuts (75-100 basis points in total) for the entire year 2026, with the FF rate falling to 3.25-3.50% by year-end. Mortgage rates drop below 6%, and signs of recovery begin to appear in the housing market. The stock market rises on rate cut expectations, with the S&P500 potentially breaking above 6,000. The exchange rate shifts towards a weaker dollar and stronger yen, with USD/JPY potentially falling below 140 yen at times. This also provides a tailwind for emerging economies, as capital inflows recover, and central banks in various countries gain room for rate cuts. Global risk appetite improves, and the latter half of 2026 approaches a "Goldilocks" (just right) economic environment. However, the realization of this scenario is predicated on a positive turn in the difficult-to-control variable of the Middle East situation, making its probability limited.
Investment/Action Implications: Substantial agreement on an Israel-Hamas ceasefire. Reports of renewed Iran nuclear negotiations. Crude oil prices fall below $75. CPI year-over-year clearly drops below 2.5%. Increased dovish remarks in FOMC members' speeches.
The Middle East situation rapidly deteriorates. Direct conflict between Israel and Iran, or military tensions around the Strait of Hormuz, pose a direct threat to crude oil supply, pushing crude oil prices above $100. A surge in energy prices re-accelerates inflation above 3.5%, forcing the FRB to discuss not just postponing rate cuts, but even the possibility of rate hikes. In this scenario, the FRB cannot implement any rate cuts throughout 2026, and the FF rate remains at 4.25-4.50% at year-end. Excessive tightening of financial conditions leads to an increase in commercial real estate defaults and heightened pressure on regional banks. The stock market experiences a 15-20% correction, with the S&P500 falling below 4,800. The unemployment rate begins to exceed 5%, marking the onset of a recession. USD/JPY breaks above 160 yen, and while the Japanese government intervenes in the currency market, its effectiveness is limited. Emerging economies begin to show signs of currency crises, with stress materializing particularly in Turkey, South Africa, and Brazil, which have large dollar-denominated debts. The FRB faces the dilemma of "fighting inflation" versus "avoiding recession," and the risk of 1970s-style stagflation becomes tangible. The end of Chair Powell's term occurs in the worst possible environment, and the appointment of his successor becomes a political issue.
Investment/Action Implications: Reports of military conflict between Israel and Iran. Crude oil prices exceed $95. CPI month-over-month acceleration for two consecutive months. Some FOMC members mention rate hikes. Sharp decline in regional bank stock prices. VIX (fear index) exceeds 30.
Key Triggers to Watch
- Policy rate decision and dot plot update at the next FOMC meeting (May 2026): May 6-7, 2026
- Significant change in the Middle East situation (direct military conflict between Israel and Iran, or an incident of vessel attack in the Strait of Hormuz): Within the next 3-6 months
- U.S. CPI (Consumer Price Index) year-over-year clearly falls below 2.5%, or rises above 3.5%: Upon release of monthly data from April to June 2026
- Expiration of FRB Chair Powell's term and White House movements regarding successor appointment: May 2026 (term expires end of May 2026)
- Crude oil prices (WTI) break above $100, or fall below $70: March to September 2026
🔄 TRACKING LOOP
Next Trigger: Next FOMC May 6-7, 2026 — Chair Powell's final FOMC. Whether rate cuts resume or rates are held for a third consecutive meeting will determine his policy legacy for his successor.
Continuation of this pattern: Tracking Theme: The Future of the FRB's Rate-Cutting Cycle — Will the easing cycle that began in September 2024 be completely halted or resumed? The next milestones are the May 2026 FOMC + Powell's term expiration.
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