Fed suggests rate cuts remain more likely than not in World Economy News 19/03/2026 Fed believes in the productivity boom There is nothing particularly surprising from the Federal Reserve outcome. A “no change” decision with a target range of 3.5% to 3.75% with only Stephen Miran dissenting by voting for a 25bp cut. Everyone else wanted stable rates, but the Fed continues to think a rate cut this year is more likely than not. The Fed appears prepared – for now – to look through a near-term energy price shock, believing that this won’t become a broader, more persistent inflationary problem that needs action. The accompanying statement acknowledges that “uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain”. Chair Powell also heavily emphasised the problems with making projections in the current challenging situation, but he believes economic activity remains “solid”. For now, though, the updated forecasts show they have retained the 2026 rate cut they had from their December update and continue to have a further 25bp rate cut in 2027. Interestingly, they have revised up GDP growth a touch for fourth quarter 2026 to 2.4% year-on-year versus 2.3% while their fourth quarter 2027 GDP growth prediction is now 2.3% versus 2.0%. 2028 is also up, while, perhaps most significantly, the Fed revised its long run GDP projection to 2% from 1.8%, suggesting they are buying into the productivity boosting effects of AI/technology investment. After all, their inflation forecasts have only been revised a little higher for this year (2.7% vs 2.5% previously for the core PCE deflator in fourth quarter 2026 with fourth quarter 2027 0.1 percentage point higher at 2.2% with 2% retained for 2028. Unemployment forecasts are little changed with long run Fed funds revised up 0.1pp to 3.1%. Greater chance inflation is indeed “transitory” this time round It looks as though the Fed are adopting a similar stance to 2021 when they believed inflation would be “transitory” during a supply shock, and they needn’t raise rates. However, back then robust hiring, soaring wage growth, pent-up demand coming out of lockdowns and stimulus checks meant consumer spending jumped significantly and inflation spiralled higher. The Fed then had to play catch-up, hiking rates 525bp between March 2022 and July 2023. Today, the labour market is in a far weaker position with job creation and real household disposable income stalling over the past six months. At the same time, confidence has been eroded by tariff worries and job security fears, so there isn’t the same demand impetus to fuel inflation. While tax refunds are expected to be quite substantial this year (around $4000 on average versus $3200 last year), we would likely need to see a larger fiscal boost, such as stimulus checks, to generate enough demand that would entrench inflation pressures and trigger Federal Reserve rate hikes. Chair Powell did suggest that the possibility that the Fed’s next move could be a hike came up in discussion, but the “vast majority” don’t see that as being the base case. We think there is a greater chance that today’s energy shock is demand destructive in that households have less discretionary spending power. This should diminish the chances of broader, more persistent inflation. Moreover, the second part of the Fed’s dual mandate of preserving price stability and maximising employment is facing greater challe