The Depths of the Fed's Rate Cut Freeze

📡 Signal — What Happened

Why it matters: The world's largest central bank has postponed interest rate cuts for two consecutive meetings, constrained by the dual pressures of Middle East geopolitical uncertainty and the risk of inflation re-acceleration. This decision directly impacts global financial markets, exchange rates, and asset prices, including Japan, and marks a turning point that will determine the direction of the global economy in the latter half of 2026.

• Monetary Policy — The FRB (Federal Reserve Board) decided to keep the policy interest rate unchanged at the FOMC meeting on March 18, 2026.
• Monetary Policy — This marks the second consecutive meeting without a rate cut, clearly indicating a temporary pause in the rate-cutting cycle that began in the latter half of 2025.
• Geopolitics — Chairman Powell stated in a press conference that "the impact of the Middle East situation on the U.S. economy is uncertain."
• Inflation — The risk of inflation re-acceleration is being watched as a major factor in the decision to keep rates unchanged.
• Monetary Policy — The FRB's federal funds rate was maintained at its current level of 4.25-4.50%.
• Economic Indicators — U.S. CPI (Consumer Price Index) showed an upward trend again in early 2026, delaying its convergence to the FRB's 2% target.
• Energy — Geopolitical tensions in the Middle East are increasing the upside risk to crude oil prices, raising concerns about inflation pressure via energy costs.
• Financial Markets — Market expectations for the number of rate cuts in 2026 have been significantly revised downwards, with the view that there will be only 1-2 cuts this year becoming dominant.
• Exchange Rate — The trend of a stronger dollar continues, with the Japanese yen remaining in the upper 150s against the dollar.
• Labor Market — The U.S. labor market remains robust, and the persistently high wage growth rate is also a factor contributing to sustained inflation.
• Politics — Amid increasing pressure from the Trump administration on the FRB to cut rates, Chairman Powell maintains a stance emphasizing policy independence.
• International Economy — The FRB's rate freeze continues to exert capital outflow pressure on emerging economies, leading to a tightening of global financial conditions.

To understand the FRB's decision to postpone rate cuts for two consecutive meetings, it is necessary to look back at the turbulent trajectory of U.S. monetary policy in the 2020s.

In 2020, in response to the COVID-19 pandemic, the FRB lowered the policy rate to near zero and implemented large-scale quantitative easing. This ultra-accommodative policy, coupled with massive government fiscal spending, led to a rapid acceleration of inflation from the latter half of 2021. By 2022, CPI reached 9.1% year-over-year, facing the highest inflation in approximately 40 years. The FRB began a rapid rate-hiking cycle in March 2022, raising rates by an unprecedented 525 basis points (5.25%) in just 16 months.

Despite this aggressive tightening, the U.S. economy showed surprising resilience. The labor market remained robust, and GDP growth stayed positive. Expectations for a so-called "soft landing" grew, and in September 2024, the FRB finally pivoted to rate cuts. From September to December 2024, a total of 100 basis points in rate cuts were implemented, bringing the policy rate to 4.25-4.50%.

However, the situation changed dramatically in 2025. The expansion of tariff policies accompanying the return of the Trump administration, rising geopolitical tensions in the Middle East, and a stronger-than-expected labor market combined to stall the downward trend in inflation. The FRB paused rate cuts at the January 2025 FOMC and maintained a cautious stance thereafter. Additional rate cuts remained limited throughout 2025.

Entering 2026, new structural challenges emerged. Heightened tensions in the Middle East created upside risks to inflation via energy prices, while the Trump administration's protectionist trade policies maintained supply-side cost pressures. Furthermore, the widening U.S. fiscal deficit put upward pressure on long-term interest rates, further complicating the FRB's monetary policy management.

Chairman Powell's reference to the Middle East situation in this press conference is extremely significant. Traditionally, the FRB has tended to avoid direct mention of geopolitical risks, but this acknowledges that instability in the Middle East has begun to concretely impact the inflation outlook through the transmission channel of energy prices → transportation costs → consumer prices.

Historically, periods when the FRB pauses during a rate-cutting cycle often mark a turning point in policy. A temporary halt in rate cuts, such as during the Greenspan era in the late 1990s or the "mid-cycle adjustment" under Powell in 2019, has historically sent important signals about the subsequent direction.

Behind this decision to keep rates unchanged lies a conflict within the FRB between hawks who believe "we should wait until inflation sustainably converges to 2%" and doves who argue "we should ease preemptively to prepare for downside risks to the economy." Chairman Powell is maintaining a data-dependent approach while balancing these views, but the added possibility of an exogenous shock from Middle East risks has made the decision even more difficult.

From a global perspective, the FRB's unchanged stance is also influencing other central banks. While the ECB (European Central Bank) is moving towards easing, it must remain cautious as the interest rate differential with the FRB could lead to a weaker euro. The Bank of Japan also wants to normalize monetary policy, but the FRB's maintenance of high interest rates strengthens yen depreciation pressure, increasing the risk of imported inflation within Japan. The FRB's every move continues to literally dictate the trends of the global economy.

The delta: With the FRB postponing rate cuts for two consecutive meetings and Chairman Powell explicitly citing Middle East geopolitical uncertainty as a reason, the possibility of a significant delay in the resumption of the rate-cutting cycle has emerged. Market expectations for rate cuts have rapidly shrunk from 3-4 times this year at the beginning of the year to 1-2 times, and the "higher for longer" scenario is once again becoming realistic. This is a structural change that will have cascading effects on global financing costs, exchange rates, and asset prices.