MNI: Fed Dots To Stay At One Cut For 2026 - Ex-Officials

A stagflationary shock emanating from the Middle East conflict is likely to delay lower rates from the Federal Reserve, though the median projection among FOMC officials this week is likely to stay at one cut for 2026, former Fed officials told MNI.

The FOMC is expected to hold the federal funds rate at 3.50-3.75% for a second consecutive meeting in March, in what could be a prolonged pause before the next move, the ex-officials said.

Former Fed officials said the March SEP will continue to be centered around one cut for this year, as in December, and potentially with a wide range. In December, four officials wrote in three or more cuts, four had two cuts, another four had one cut, and seven preferred rates on hold or higher. 

"In terms of making a forecast based on the data that we have today, I think they’ll probably stick with pretty close to where they were," former St. Louis Fed President James Bullard told MNI. "It’ll be about watching and waiting, not about actually changing the forecast." 

EXTENDED PAUSE

Additional easing steps likely wouldn't come until later this year, unless the broad direction of the U.S. economy shifts, with a hit to growth and demand or spillback from the global economy, the ex-officials said. 

"At this point in the year, probably they're comfortable with the one-cut median, since that cut can be in the second half and does not require a change to the near-term stance of policy," former Atlanta Fed President Dennis Lockhart told MNI. "I think the situation allows for being patient."

For now, the Fed is more likely to look through the shock from the Iran conflict even if the risks cut in both directions, underpinning the divides on the FOMC, they said. 

"My guess is that it is too recent and too high a probability of being mostly temporary to cause much change to forecasts and policy preferences," said Joseph Gagnon, a former Fed Board economist. 

The longer the war snarls supply chains and keeps energy prices higher, the more likely it impacts the Fed's reaction function. 

"If it lasts two weeks, that's one answer. If you tell me it lasts six or eight weeks, I have a different answer. And if it's three months or more, I have yet another answer," ex-Dallas Fed President Rob Kaplan said. 

"I would still think that the median will be one or two cuts," Kaplan said of the SEP. "That doesn't mean they'll do one or two cuts. I still think they'll project that in the out months later this year." (See MNI POLICY: Fed Embraces Pause As Downside Labor Risks Abate)  

TWO-SIDED RISKS

Despite the Fed's easing bias, the central bank's post-meeting consensus statement could reference uncertainty and the two-sided risks facing its employment and inflation goals. Minutes from the January FOMC meeting noted "several participants" indicated they would have supported a two-sided description to future interest rate decisions. 

"I think right now [there could be] a statement that recognizes that either up or down is a possibility," said former Boston Fed President Eric Rosengren. 

William English, former director of the Fed Board's division of monetary affairs, said he sees little change in the SEP, and that the central bank needs to keep some two-sided guidance. 

"They've been worried for a while that inflation being persistently above target would ultimately cause inflation expectations to move up, even kind of medium- and longer-term expectations," English said. "If that happens, then you have to respond with tighter policy, because you don't want a replay, even in miniature, of what happened in the 1970s where inflation expectations really came unstuck."