• No change in Fed Funds range: 3.5% to 3.75%.
• Only one dissent for a cut. 
• Fed members project one cut later in 2026 and one in 2027.
• Expects inflation rate at 2.7% at the end of 2026, up from 2.4% in December.
• Bottom Line: Fed trying to stay out of limelight and wait for inflation shock from war.

Sit tight

The Federal Reserve Open Market Committee left its short-term rate unchanged after its two-day meeting today. Their press release stated that the economy has been “expanding at a solid pace.” They added a new sentence: “The implications of developments in the Middle East for the U.S. economy are uncertain.” More on that in a moment. Inflation “remains somewhat elevated” in the Committee’s view.

Last fall the Committee dropped the Fed Funds rate in three quarter-point steps, citing slowing job growth. Recall that two of these cuts came during the longest government shutdown, which skewed growth statistics lower. Today’s meeting marks the second meeting in a row where the members have left rates unchanged. Stephen Miran was the lone vote for a quarter-percent rate cut.

Shocks

Seeing no change in short-term rates and that the economy is “expanding at a solid pace,” one would think the world is calm. Over the past 12 months, shocks to the economy have piled up: 1) tariffs cutting trade, 2) closing borders and now 3) energy supplies from the Strait of Hormuz.

And just since that prior meeting at the end of January, oil prices are up more than 50%; stock markets and gold are down. Flight-to-safety war worries have driven the dollar higher. Higher commodity prices combined with little job growth means the stagflation talk has ramped up. Note that stagflation back in the 1970s meant double digit inflation and unemployment. We are nowhere near that concern.

We expect the administration to be successful this summer in finalizing tariff levels at or just below 10%. This will be roughly half of the feared Liberation Day levels, and tariff revenue will fall below last year’s levels in the second half of this year. Immigration was a large component of job growth post-virus shutdowns. That spigot has turned off, and labor will have to come from unemployment rolls and re-training. Oil futures markets are pricing deliveries, falling back to pre-war levels later this year. We would note that the tax rebate savings of approximately $150 billion may be spent on higher fuel prices over the next several months. 

What's next?

In their quarterly projections report, the Committee raised their inflation expectations to 2.7% from 2.4% in the December estimate. So, the Fed is wary of oil price inflation. Hopefully the Fed is aware of the oil embargo of 1973–74, when the Fed raised rates in response to oil “inflation” and throttled economic growth. 

Overall, the statement and Powell’s press conference were fairly neutral. Markets, however, took the message of war uncertainty, solid economy and little change in unemployment as a “hawkish” sign that the Fed would be biased to raise rates rather than cut. Please see the prior paragraph!

One would expect war uncertainty to cause Committee members to reign in growth and rate expectations. Instead, both long-term numbers were raised by participants, suggesting they see through the war effects to better growth days ahead. 

Two final items of note:

1. The status of Powell’s tenure has been constant in Wall Street headlines over the past six months. Trump obviously wants him out. The Committee did vote to retain Powell as Chair Pro-Tem until Warsh is confirmed. Since his confirmation hearings are on hold thanks to Senator Tillis, this could set up an interesting confrontation between the administration and the Senate. 
2. Powell and the Committee think that AI-driven productivity will outpace any slowdown from the Iran war. While we are on board with AI helping us in the office, we wonder if globally that thinking is a bit premature. 

Summary

The Fed tried to stake out a neutral stance away from war-related price shocks and other hits to growth. Markets interpreted the Committee’s improving growth projections as signs the next move in rates is higher, not lower. Stock, commodity and bond prices are all off their highs for the day.

Interest rate and stock markets have been in a consolidation range for the past several months, waiting for political events. Unfortunately, they will have to wait a while longer.

We remain confident that regulatory reforms and coming tax law changes will spur growth and spending this year. Sanity is descending on A.I. data center spending but it will easily exceed last year’s $360 billion. Tariffs will be lower later this year. The Iran war effort is being prosecuted in measured steps by the U.S. and Israel, and we believe they will stick to their Phase I timetable of around six weeks.

Please let us know how we can help you. 

Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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