Instant Insights: Fed retains easing bias for now | Insight Investment

The FOMC signaled an extended pause on further interest rate moves but continued to project one cut by the end of the year. The central bank acknowledged the war in Iran presents uncertainty, but we expect the Fed to maintain an easing bias unless the supply shock proves protracted.

The FOMC continues to project one cut in 2026

The FOMC revised higher its year-end median forecasts for headline and core PCE inflation (from 2.4% and 2.5%, respectively, in the December meeting) to 2.7% in 2026, likely to reflect the impact of the global oil price shock.

Nonetheless, the committee’s median “dot plot” projections continued to reflect one rate cut this year, matching implied market pricing (Figure 1). Elsewhere, the central bank marginally increased its projections for GDP growth and left its unemployment rate projections largely unchanged.

Figure 1: The FOMC’s median “dot plot” Fed funds rate projections remained unchanged

Source: Federal Reserve, Bloomberg, Insight, March 2026

Fed reacts to oil price shock with caution

Chair Powell nears the end of his term (on May 15, 2026) facing an unwelcome oil shock, potentially just as tariff inflation peaks and core services drive durable disinflation.

The FOMC’s policy statement acknowledged “The implications of developments in the Middle East for the US economy are uncertain”. Nonetheless, the committee appears to retain an easing bias overall. Chair Powell separately noted “There will be some effects on inflation” but noted it is “standard learning that you look through energy shocks … dependent on inflation expectations being well anchored”.

Previous oil shocks offer an insight into the Fed’s likely playbook. The central bank concluded that the 2022 oil shock had relatively contained impacts on core inflation and economic activity. The 2007-08 oil shock also appeared to have had a modest impact on core PCE, albeit economic conditions were more fragile and the event preceded the “shale revolution” (after which the US became the world’s leading oil producer).

Figure 2: The US economy may be more able to absorb an oil shock today than in 2008

Source: Bloomberg, Insight, March 2026

Therefore, we expect the Fed will be inclined to “look through” the spike in oil prices for now. However, the longer the oil shock lasts, the greater risk of durable second-round effects and unanchored long-term inflation expectations. As such, we will continue to watch developments in the Middle East closely.