Rising oil prices reshape the path of rate cuts! The Federal Reserve remains on hold for the second time in a row, raising inflation expectations across the board.

Against the backdrop of rising inflationary pressures and escalating geopolitical risks, the Federal Reserve chose to hold steady. On Wednesday, the Federal Open Market Committee (FOMC) decided by a vote of 11 to 1 at its latest rate-setting meeting to keep the federal funds rate unchanged at a range of 3.5% to 3.75%. This marks the second consecutive meeting without a rate cut, with only board member Milan supporting a 25 basis point cut. The decision comes at a critical time, as Middle East conflict pushed international oil prices briefly above $109 per barrel and unexpectedly high U.S. February Producer Price Index (PPI) weakened market expectations of a rate cut later in the year. The latest economic projections and dot plot released at the meeting show a significant divergence among Federal Reserve officials on the future path of interest rates, but overall sentiment is cautious. Most officials still expect a 25 basis point rate cut in 2026 and another in 2027, but compared to previous market expectations of multiple rate cuts, the policy path is clearly tightening. Following the meeting, Fed Chair Powell stated in a press conference that the outlook for rates depends entirely on the inflation trend, and if progress is not seen, there will be no rate cut. He emphasized that "monetary policy has no preset path and decisions will be made on a meeting-by-meeting basis." It is worth noting that the Fed has raised its inflation expectations across the board. According to the latest forecasts, the PCE inflation rate for 2026 has been raised to 2.7%, up from the previous 2.4%, while core PCE inflation has also been raised to 2.7%. Powell admitted that while inflation is expected to come down, progress "will not happen as quickly as previously expected," and that there will be some progress, but not as much as hoped for. He also pointed out that tariff factors and recent increases in energy prices are driving commodity inflation higher, and short-term inflation expectations have risen significantly due to the surge in oil prices. Since the end of February, when the U.S. and Israel launched military actions against Iran, international oil prices have continued to rise, becoming a key variable in the current inflation path. Powell stated that energy price shocks will have a "dual impact" on the economy, pushing up inflation on one hand and suppressing consumption and employment on the other. However, he also pointed out that as a net energy exporter, high oil prices will to some extent offset the economy through increased profits and investment in the energy sector. But he emphasized that this offsetting effect depends on whether oil prices will remain high in the long term, as "companies will only expand investments when they are sure that prices will remain high." Despite growing concerns in the market about stagflation risks, Powell clearly stated that the current economy is far from reaching that level. "Stagflation is a concept from the 1970s, when unemployment and inflation were at extremely high levels, whereas today the unemployment rate is close to its long-term equilibrium level, and inflation is only about one percentage point above target," he said, preferring to view the current environment as "complex but manageable." In terms of the economic fundamentals, the Fed painted a picture of "growth still decent but risks rising." The latest forecasts show a slight increase in GDP growth to 2.4% in 2026, reflecting expectations of productivity gains, while the unemployment rate remains at 4.4%. However, the statement removed the previous phrase "labor market has stabilized" and replaced it with "changes have been modest recently," indicating a weakening confidence in the momentum of the job market. Powell also admitted that current policy is facing a dilemma, with "employment risks on the downside supporting a rate cut, while inflation risks on the upside mean rates need to be maintained or even raised," bluntly stating, "we are in a very difficult balance position." Due to the policy signals and Powell's speech, financial market volatility intensified. Major U.S. stock indices fell during the press conference, with the Dow falling over 768 points, while the S&P 500 and Nasdaq fell by 1.36% and 1.46% respectively; at the same time, U.S. Treasury yields and the dollar strengthened, significantly reducing market expectations of a rate cut later in the year. Currently, interest rate futures show that investors expect only one rate cut by the end of the year. The baseline scenario currently remains unchanged interest rates and gradual rate cuts. Powell revealed that the committee has indeed discussed the possibility of raising rates again, but emphasized that this is not the prevailing view. "The vast majority of officials do not believe that hiking rates is the base case," he said. This statement further reflects the uncertainty in the Fed's policy path amid unclear inflation and growth prospects. In addition, political and legal factors surrounding the Fed leadership have also become a focus of market attention. Powell stated that he has no intention of leaving the Board until the investigation into the renovation of his office is "completely over," and even if a successor has not been confirmed by the end of his term as Chair, he will continue to serve as acting Chair. He also stated that whether he will continue to serve in the future will depend on "the best choice for the institution." Currently, Trump's nominee for successor, Kevin Warsh, is still embroiled in a confirmation stalemate due to related investigations and political maneuvering. Overall, against the backdrop of rising inflation expectations, rising oil prices, and continued disturbances in geopolitics, the Federal Reserve is shifting towards a more cautious policy stance. The consensus in the market is that interest rates will remain high for a long time, and the evolving situation in the Middle East and trends in energy prices will be key variables in determining the future path of monetary policy.