The US Federal Reserve kept the bellwether Fed funds rate steady at 3.5-3.75% at its most recent policy meeting ( early Thursday Hong Kong time ) as global central banks take a “wait-and-see” stance amid the escalating Middle East conflict that is sending oil prices surging.

The Fed also published its first Summary of Economic Projections ( SEP ) for 2026, which showed that officials maintained a median forecast for one rate cut in 2026.

 "The implications of developments in the Middle East for the US economy are uncertain," Fed chairman Jerome Powell says in a news briefing, "We will remain attentive to risks to both sides of our dual mandate. Our summary of economic projections projects that real GDP will rise to 2.4% this year and 2.3% next year, somewhat stronger than projected in December."

For the Fed, this supply shock has dramatically altered market expectations for interest-rate cuts, but most analysts believe aggressive tightening rhetoric is premature.

Before the Fed announcement, markets have swiftly repriced. Before the conflict intensified in late February, Fed funds futures implied roughly 61 basis points of easing by December 2026. Now, only about 25bp, or essentially one cut, is priced in for the full year.

The consensus across investment houses is clear: policymakers will cite heightened uncertainty rather than offer fresh forward guidance.

 “There are simply few concrete conclusions to draw at the moment,” notes iFlow’s March 2026 FOMC preview. The Fed entered its blackout period the day before hostilities escalated, leaving Wednesday’s ( Thursday Hong Kong time ) statement as the first official word since the current conflict began.

Inflation expectations

Views diverge modestly on timing but converge on direction. Nigel Green, chief executive officer of deVere Group, argues that the first Fed rate cut for 2026 is now unlikely to come before July at the earliest. Surging oil, which briefly hit US$120 per barrel, combined with sticky core CPI ( 2.5% year on year in February ) and resilient US consumer spending, has pushed back expectations.

“Energy prices are feeding directly into inflation expectations again,” Green says. “There’s little urgency to cut immediately.”

T. Rowe Price chief US economist Blerina Uruci maintains her baseline for a dovish Fed in the second half of 2026. She still anticipates two to three cuts this year, and three to four over the next 12 months, assuming the energy shock does not leave a lasting imprint on core inflation.

“The market has about one cut priced for this year… The move appears to be driven by the energy price shock, which I do not think will have a limited effect on monetary policy decisions 9-12 months from now,” Uruci wrote ahead of the meeting.

Laura Cooper, Nuveen’s global investment strategist and head of macro credit, echoes this caution. Even if oil remains elevated through year-end, she estimates core PCE inflation might rise only 0.3 percentage point while real GDP growth faces a comparable drag – roughly 0.3pp lower to 1.7% in 2026.

“Such a trade-off would likely reinforce the case for gradual Fed easing rather than renewed tightening,” Cooper says. Risks, in her view, are skewed towards additional cuts in 2027.

Supply disruptions

Meanwhile, iFlow has trimmed its own forecast by one cut, now projecting two reductions beginning in Q3, provided the conflict de-escalates and oil prices retreat.

BlackRock Investment Institute similarly expected the Fed to hold rates this week but continues to favour easing into 2026, citing persistent AI-driven growth supporting US equities.

The key debate centres on whether the oil shock proves transitory or persistent. Central banks cannot resolve supply disruptions with higher rates as hikes would only suppress demand and compound growth drag. Long-horizon inflation expectations have barely budged, remaining anchored within recent ranges.

Data on shipping traffic through the Strait of Hormuz, now running at just 7% of the prior 12-month average, will be watched closely. Analysts across Nuveen, T. Rowe Price, and BlackRock agree that a gradual reopening in the coming weeks would support policy patience rather than renewed hike rhetoric.

Markets may remain volatile, but the Fed’s data-dependent approach points to eventual easing – just later and more gradually than previously anticipated. The duration of the conflict, not headline rhetoric, will ultimately dictate the pace.