Fed Skips Rate Cut for Second Straight Meeting — Middle

📡 Signal — What Happened

Why it matters: The world's largest central bank's continued pause in its rate-cutting cycle signifies a shift from the easing trend that began in late 2025, marking a structural turning point that will ripple through global financial markets, exchange rates, and emerging economies. The uncertainty surrounding the Middle East situation, and its risk of reigniting 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 without a rate cut, following the decision to keep rates 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, reiterating a data-dependent approach.
• Background - Inflation — Caution against a re-acceleration of inflation is cited as the primary reason for the FRB's cautious stance.
• Geopolitics — Concerns are rising that the escalating tensions in the Middle East could impact the U.S. economy through upward pressure on energy prices.
• Interest Rate Level — The current target range for the FF rate remains at 4.25-4.50% (the 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 diminished.
• 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 high $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 decision to postpone 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 began 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 from its peak of 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 pause as early as January 2025. This was due to a slowdown in the pace of inflation decline, with service sector inflation proving particularly sticky. Throughout 2025, the FRB maintained a "data-dependent" stance, adopting an irregular easing pattern of alternating between 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, reigniting concerns about energy supplies via the Strait of Hormuz. Crude oil prices began an upward trend from late 2025, reaching the high $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. The FRB at that time (under Chair Burns) eased policy prematurely 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 facing the Powell FRB lies precisely between these historical lessons and present 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 "uncertainty," 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 easing cycle, which began in September 2024, is transitioning from a de facto "temporary pause" to a "prolonged pause." What has fundamentally changed is that the uncertainty surrounding the Middle East situation 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.