Fed Says Too Soon to Judge War as Prices Keep Rates on Hold

Ian Lyngen, Head of US Rates Strategy at BMO Capital Markets, discusses his takeaways from the March Fed decision and what to expect going forward.

Federal Reserve Chair Jerome Powell made it clear the US central bank won’t cut interest rates again until inflation resumes cooling. And that’s before it even starts considering the possible impact of the war in the Middle East.

Powell, in a press conference Wednesday, underscored that it was still too soon to gauge the effects of a surge in oil prices on the US economy, even as financial markets have raced to price in higher expected inflation over the year ahead. Instead, he dwelled on signs, even prior to the outbreak of war, that price pressures were lingering longer than policymakers had hoped.

“The thing that’s really important that we see this year is progress on inflation,” Powell said. “If we don’t see that progress, then you won’t see the rate cut.”

The Fed chair’s comments, delivered after a decision to leave rates unchanged for a second straight meeting, reinforced the notion that the central bank is still a long way from resuming a string of rate reductions it undertook at the end of 2025 as data on consumer prices refuse to cooperate.

That trend also raises the specter that the Fed’s next move may ultimately be a hike, a possibility Powell acknowledged came up again in discussions this week — though that’s not the base case for the majority of policymakers, he added.

Interest-rate markets show the probability of one rate reduction as a coin-flip, whereas just three weeks ago they were leaning toward three cuts. Yields on two-year US notes — the most sensitive to the Fed’s policy changes — rose as much as 10 basis points to nearly 3.78% on Wednesday, the highest in seven months.

In fresh projections released Wednesday, officials maintained their call for one rate cut this year, according to the median estimate. But they also unexpectedly revised up their projections for economic growth, suggesting they’re not yet concerned about the possible dampening effect of higher energy costs.  Treasuries sank and traders no longer priced in any chance of an interest-rate cut the US this year after the Bank of England said it would be ready to act against inflation.

The move pushed yields higher across maturities, with those on two-year Treasuries — most sensitive to the Fed’s policy changes — higher by 13 basis points to 3.9%. Bond traders erased their wagers on a rate cut in the US this year, with some even hedging for a potential hike in the coming months.

“This is all being driven by the Bank of England rate decision as markets are looking for 50 basis points of hikes now in 2026,” said Tom di Galoma, managing director at Mischler Financial Group. “Bond markets in Europe are in free fall and that is driving US yields up as well.” He said flows were defined by an absence of buyers “and mainly selling taking place,” with sentiment dominated by expectations of an extended conflict. “The Iran war that could go on for months instead of weeks is the current thought.” The move in yields accelerated, accompanied by high volumes in Treasury futures, after the Labor Department’s weekly tally of new jobless claims declined unexpectedly. The figures signaled labor-market strength with the potential to further erode Fed policymakers’ conviction that the US economy requires lower interest rates to support employment.

The BOE on Thursday voted unanimously to keep rates on hold and said it “stands ready to act” to tackle any inflation surge triggered by war in the Middle East.

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals