The minutes of the FOMC meeting of March 17-18, 2026, which took place just a week after the start of the US-Israel conflict against Iran, portray a committee grappling with a radically changed macroeconomic scenario. The FOMC voted 11-1 to keep the key rate in the 3.5-3.75% range, with only Stephen Miran favoring an immediate 25 basis point cut. The conflict had already caused a roughly 50% surge in short-dated oil futures and a nearly 50 basis point rise in the one-year inflation swap rate, while measures of longer-term expected inflation remained largely unchanged, a sign that markets expected a relatively temporary energy impact.
Inflation and the labor market
At the time of the meeting, total PCE inflation stood at 2.8% and core inflation at 3.1%, both about a quarter of a point above year-earlier levels. Participants acknowledged that progress towards the 2% target had stalled in recent months, with prices of core goods still elevated due to tariffs and non-housing services still above pre-pandemic levels. On the employment front, the unemployment rate was stuck at 4.4%, but job creation remained low, concentrated in a few sectors. Several participants reported signs of potential weakness, citing companies’ hesitation in hiring decisions also due to the possible effects of artificial intelligence on the job market.
The Fed’s dilemma
The document reveals a committee aware that it faces unusual two-way risks. A majority of participants rated both the upside risks to inflation and the downside risks to employment as high, noting that a prolonged conflict could require cuts – if rising oil prices squeeze purchasing power and slow the economy – or hikes if inflation proves more persistent than expected. Some members explicitly requested “two-way” wording in the post-meeting statement to reflect this dual possibility. All participants agreed that monetary policy is not on a predefined path and will be determined on a meeting-by-meeting basis.
The outlook
The staff projections revised growth estimates slightly downwards from January and inflation estimates upwards for 2026, incorporating only a limited effect of the conflict on real activity. Real GDP is expected to grow in line with potential until 2028, with inflation set to return to close to 2% by the end of 2027 once the effects of tariffs and oil have worn off. However, many participants warned that these scenarios were subject to exceptionally high uncertainty. Markets, which before the meeting were still pricing in a cut by December, subsequently shifted expectations towards no intervention in 2026, even if the ceasefire announced in the following days brought some probability of easing back on the table. The next FOMC meeting is scheduled for April 28-29, 2026.
