Fed chooses dovish hold

Executive summary

Federal Reserve (Fed) policymakers kept rates unchanged in a range of 3.50% – 3.75%, which was widely expected. It also maintained its temporary buying of $40 billion‑per‑month U.S. Treasury bills to rebuild reserves.

The committee also released its quarterly economic projections, forecasting one rate cut this year, increasing economic growth this year and next, and boosting near-term inflation.

Following the Federal Open Market Committee (FOMC) rate announcement and Chair Powell’s press conference, U.S. stocks and bonds extended their morning declines. The S&P 500 declined more than 1%; the 10-year U.S. Treasury yield rose above 4.25%.

For now, the Fed appears to be looking through the impacts related to the Iran situation and attributing its upgraded outlook for economic growth in 2026 to expected productivity gains.

We didn't expect any policy changes at this meeting, especially given the uncertain impact of rising energy prices on inflation data. Looking ahead, we maintain our view that the federal funds rate remains on a course towards 3%; however, the recent shock in energy prices likely keeps the Fed on hold until the latter half of 2026.

What happened

At its March rate-setting meeting, the FOMC maintained the target range for the federal funds rate at 3.50% – 3.75%. Governor Stephen Miran dissented again in favor of a 25 basis point (0.25%) cut. He’s now dissented at five consecutive meetings wanting larger rate cuts than the rest of the committee, consistent with every meeting in which he’s voted.

The FOMC released its quarterly Summary of Economic Projections, which now sees modestly more economic growth in 2026 and 2027. Although near-term inflation forecasts increased compared to their December view, the outlook still pencils in one rate cut each in both 2026 and 2027.

Chair Powell struck an exceedingly cautious tone during the post-meeting press conference. He also reiterated the committee’s pledge to allow incoming data to drive the decision-making process and that policy rates are not on a preset path. Notably, he characterized the central bank’s current rate setting as in the range of modestly restrictive to neutral.

On a personal note, Chair Powell confirmed that he will stay on as acting FOMC Chair until the new chair is confirmed. Additionally, he will stay on the Fed Board until the investigation by the Department of Justice is over, though he hasn’t decided if he will stay on the Board beyond that point. 

Our take

The uncertainty in the aftermath of the Iran situation has forced the Fed into a tight spot, wedged between stickier inflation and faltering job growth. Accordingly, we expected Chair Powell to lean heavily on the notion of being “data dependent" and cautious – and he delivered.

We continue to expect the Fed to lower policy rates towards 3%; however, further rate cuts are still predicated on the tenor of the data. As Chair Powell noted, one side of the Fed’s dual mandate isn’t more important than the other. In other words, stickier inflation doesn’t preclude rate cuts if the labor market deteriorates further.

That said, the timing of rate cuts is less certain, and could be delayed until the latter half of the year, allowing policymakers time to gather more information about the impact on inflation as a result of the Iran situation.

Bond market implications

The shutdown of the Strait of Hormuz effectively halting the distribution of crude oil has steered energy prices and inflation expectations higher. Additionally, the market is pricing in a longer delay before the Fed can resume rate cuts than previously expected. That has pushed the U.S. Treasury yield curve higher, with 2- to 30-year yields rising about 25–35 basis points (0.25-0.35%). The increase has been most concentrated in the 2- to 7-year segment.

Headed into today’s rate announcement, traders had fully positioned for the Fed to remain on hold for all of 2026. Thus, the immediate reaction to the Fed leaving policy rates unchanged was very muted. The reality is that the Fed is caught between the two sides of their dual mandate – full employment and price stability. Recent data show inflation is hovering above target, with the Fed itself now predicting limited additional progress towards its 2% inflation objective by year end. Meanwhile, the labor market has slowed significantly. Job growth has effectively stalled, though outright layoffs have been relatively contained.

Yields drifted slightly higher across the curve once Chair Powell began his press conference, largely based on comments that Fed rate policy isn’t on a preset course and that further rate cuts will require cooler inflation readings. By the conclusion of his comments, 2-year and 10-year U.S. Treasury yields were trading at roughly 3.75% and 4.25%, respectively, which are now approximately 15-25 basis points (0.15-0.25%) higher year to date.

In an economic environment that warrants further easing, we expect yields between 5- and 30-year maturities to decline as well, though likely to a lesser degree (i.e., the “stickiness” continues). How quickly and to what degree intermediate and longer interest rates fall will be partially dependent on how quickly a resolution is achieved in the Middle East.

U.S. Treasury yields, which are the primary driver of core fixed income yields in general, are near our assessment of fair value. Thus, we reiterate our preference for a neutral portfolio duration stance. U.S. credit spreads have widened somewhat sharply from historically tight (i.e., expensive) levels, reflecting geopolitical, inflationary, and policy uncertainty. While U.S. credit spreads remain below long-run averages, we are monitoring the investment grade and high yield corporate bond sectors for compelling entry points and an improved risk-reward profile.

Bottom line

The Fed appears to be looking through the Iran-related shock, instead attributing its stronger 2026 growth outlook to expected productivity gains. As anticipated, policymakers made no changes at this meeting amid uncertainty around how higher energy prices may feed into inflation. We continue to expect the federal funds rate to move toward 3%, though the recent energy price spike likely keeps the Fed on hold until the latter half of 2026.