In what is supposed to be Jerome Powell’s next to last meeting as chairman, there was plenty for the FOMC to discuss, but little action taken.  As expected, there was no rate cut at today’s meeting, but changes to economic projections and comments at the press conference gave some light into how the Fed is processing political and geopolitical events, and how those events are shaping the Fed’s outlook.

The only notable change in the Statement from January was the addition of a new sentence stating the “implications of developments in the Middle East for the U.S. economy are uncertain.”  Notably Fed Governor Miran once again voted against today’s decision to keep rates unchanged, preferring a 0.25% rate cut. Governor Waller, who also dissented in favor of a cut back in January, voted with the remaining FOMC members to keep rates unchanged.  

Moving to the Summary of Economic Projections (the “dot plots”) shows inflation concerns rising, but anticipated to be short-lived.  The Fed’s preferred PCE inflation measure is now forecast to rise 2.7% in 2026, versus a 2.4% forecast back in December. But inflation is still expected to move toward the longer-run 2.0% inflation target by the end of 2027.  At the same time, the Fed slightly upgraded the outlook for GDP for 2026 (to 2.4% from 2.3%) as well as for each of the next two years.  The unemployment rate forecast for 2026 remained unchanged.  

The question now becomes, should the Fed react to what they expect is a temporary inflation impact and largely outside of their control?  Early in the press conference, Powell made a surprisingly transparent and honest comment that even the FOMC is taking today’s forecasts with a grain of salt, stating that many members have “no conviction” on how things will evolve and therefore moved little from what they had forecast before events in Iran began. 

Instead, the Fed is focused on goods inflation and watching if tariff-related price increases from last year roll off in 2026. It’s a bit odd the emphasis the Fed continues to put on goods inflation, considering PCE goods prices rose 1.3% in the twelve months ending in January, compared to 3.5% inflation in the less tariff-exposed services sector.  Yet when this stubbornly high services inflation, most notably in the “super-core” inflation category (PCE services excluding energy and housing) that the Fed itself created during COVID came up during Q&A, Powell largely dismissed it, saying simply that it’s frustrating these prices haven’t declined, but they should come down eventually.  Apparently if it doesn’t fit the Fed narrative of the day, it’s not worth dwelling on.

Finally, Powell addressed his future with the Fed.  In the event that a new Chair is not confirmed before Powell’s term ends on May 15th, he will stick around and continue to serve his role until a replacement is appointed. He also stated that he has no intention of leaving the Federal Reserve Board of Governors until his ongoing investigation with the Department of Justice is well and truly behind him.  As a reminder, his term as Fed Chair ends mid-May, but his seat on the Board of Governors runs through January of 2028. It’s unusual for a Fed Chair not to vacate their seat on the board when their Chairmanship is up, but it is not required, and Powell may linger at the Fed for the foreseeable future.     

What should you takeaway from today’s meeting?  The Fed isn’t sure how the economy, inflation, or the employment market will react to events in Iran, and they aren’t interested in guessing.  There are six weeks between now and the next FOMC meeting at the end of April, and by then we should have a much better idea of both the magnitude and duration of the economic ripples out of the Middle East. In terms of inflation, we still believe that the M2 money supply is a much more reliable tool for forecasting sustained inflation. To track our ongoing analysis of how oil flows, tariffs, employment, and the money supply are impacting the outlook for the United States, we would encourage you to keep an eye on our Three on Thursday publications.

Brian S. Wesbury – Chief Economist

Robert Stein – Deputy Chief Economist

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