No more rate cuts in 2026? Rate hike in 2027? Read on for our March Fed meeting recap.

• The Fed left rates unchanged at 3.50% - 3.75%, but the meeting carried a more cautious and hawkish tone than before.
• Inflation remains sticky, while the Middle East oil shock has introduced fresh upside risk. Meanwhile, job creation remains weak, although unemployment is still contained.
• The Fed’s quarterly projections showed higher inflation expectations for 2026, alongside greater dispersion and uncertainty. Its 2026 interest rate projections (dot plot) turned more hawkish, even though the median expectation was unchanged.
• Rate cuts now look very unlikely in the next few meetings amid heightened uncertainty. The trajectory of policy rates will depend heavily on the severity and duration of any inflation shock; if cuts do occur, they would likely only come at the end of 2026 at the earliest.
• We continue to favour a shorter-duration exposure in this environment. Medium-term bonds can still provide good opportunities, but selectivity is important given heightened duration risks.

Fed Funds Rate unchanged: 3.50% - 3.75%

The US Federal Reserve (Fed) left the target range for the Federal Funds Rate unchanged at 3.50% - 3.75%. The statement changed little overall: the economy was still expanding at a ‘solid pace’ while inflation remained ‘somewhat elevated’, and job gains ‘remained low’. The main new addition was a reference to developments in the Middle East, which the Fed said could have an uncertain impact on the US economy.

Markets tumbled on 18 March after the combination of a hotter-than-expected PPI reading, a sharp spike in oil prices, and the Fed meeting itself. US equities fell by more than 1%, while US Treasury (UST) yields climbed across most tenors, with the larger moves concentrated in 2-year to 10-year tenors. Markets also continued to pare their expectations for Fed cuts in 2026 (Table 1).

Table 1: Market movements on 18 March

Press conference highlights: more caution, more uncertainty

On inflation, Powell said PCE inflation remained around 3%, partly driven by tariffs. However, rising energy prices linked to the Middle East have now introduced a fresh inflation risk. While the Fed would typically be more willing to ‘look through’ an oil shock, Powell made clear it would not do so casually this time, after five years of above-target inflation. Given inflation levels, we expect the Fed to watch closely whether higher oil prices keep inflation sticky and whether inflation expectations remain well-anchored.

On employment, Powell again struck a cautious tone. He acknowledged that job creation has been very weak, with ‘effectively … zero net job creation’ in the private sector. While he stopped short of sounding outright negative, he admitted this had a ‘downside risk feel’. Overall, we believe macroeconomic data points to a labour market softening but not collapsing.

Overall, Powell’s message was that uncertainty has increased materially. While the Fed remains data-dependent, the bar for easing has likely risen in the near-term as policymakers await more clarity on macroeconomic and geopolitical developments.

Fed’s projections (including dot plot): Leaning slightly more hawkish

The most important change in the March projections was inflation. The median forecast for 2026 core PCE inflation (y/y) rose to 2.7% from 2.5%, while that for 2027 was revised slightly up to 2.2% from 2.1%. Policymakers still project inflation returning to 2.0% by 2028, but their projections encompass a wider range (2.3% - 3.4%) compared to before (2.1% - 2.8%), reflecting greater uncertainty. This is consistent with Powell’s emphasis on tariff-related inflation and the added uncertainty from an oil shock.

GDP and labour market projections changed less. GDP growth forecasts were revised slightly higher, including 2026 growth at 2.4% from 2.3%, with Powell attributing part of this to higher productivity expectations (e.g. due to AI). Unemployment forecasts remained broadly stable around the 4.0% - 4.5% range, consistent with Powell’s view of a low-hire, low-fire labour market.

(Note: For unemployment, the 2026 median forecast was unchanged, though the mean forecast increased slightly.)

These macro projections fed into a more hawkish dot plot. While the headline median expectation still implies one cut in 2026, the underlying distribution shifted in a hawkish direction (Chart 1).

Chart 1: Dot plot comparison from Dec 2025 to Mar 2026

What you should know about US inflation and the labour market

Recent inflation data point to a need for continued caution from the Fed. February CPI (y/y) came in at 2.4% headline and 2.5% core, while January PCE (y/y) was firmer at 2.8% headline and 3.1% core (Chart 2). Services inflation remained an important contributor, while the latest PPI print was also hotter than expected (Table 2). Even before the latest oil shock, inflation was not yet comfortably back near target.

The labour market has cooled but does not yet show signs of a major breakdown. February payrolls were weak, although there was some noise from factors such as weather and labour strikes. Unemployment appears to have stabilised in the 4.3% - 4.5% range, wage growth remains decent around 3.5% - 4% y/y, while JOLTS indicators have not deteriorated sharply. Overall, the data may be soft enough to keep the Fed alert, but not weak enough to force imminent cuts.

Chart 2: Inflation remains sticky above the 2% level

Table 2: Selected components of PCE inflation

Implications of the US-Iran conflict, particularly on inflation

A prolonged US-Iran conflict could push inflation higher in the coming months through oil and fuel prices. Brent crude oil prices have already risen sharply month-to-date (MTD) (>30%), with a 2023 Fed study suggesting a 10% increase in Brent prices could raise headline CPI by almost 0.4pp (including second-order effects).

Furthermore, retail gas and diesel prices have already risen by over 20% MTD (Chart 3). The PCE basket comprises ~4% in energy goods and services and ~2% in gasoline and other energy goods; the CPI basket comprises ~6% in energy goods, of which ~3% is gasoline. Simply applying a 20% increase without detailed modelling suggests an inflation impact of roughly 0.5pp to 1pp.

Looking back to 2022 (Russia-Ukraine conflict), retail gas and diesel prices also surged (> 50% y/y), while CPI inflation peaked at 9.1% with energy contributing 3.0pp. The inflationary impulse this time may not be severe due to lesser supply-chain disruptions and a cooler labour market today. Still, a sustained oil shock would certainly have a noticeable impact on US inflation.

(Note: In 2008, oil prices similarly spiked sharply (to >$140/bbl), and CPI inflation peaked at 5.6% in Jul 2008 from 2+% a year before. However, that episode was followed by a deep recession, making it difficult to isolate the impact of the oil shock from recessionary forces across 2008 – 2009.)

Importantly for the Fed, short-term breakevens have also risen sharply MTD amid this conflict, with 2y breakevens trading around 3.4% (end-Feb: 2.8%), significantly higher than the 2% level. 10y breakevens pushed higher too to 2.4%, but by a smaller amount (end-Feb: 2.3%) (Chart 4). Hence, apart from the actual inflationary impact, the Fed will likely closely watch for shifts in inflation expectations to ensure they remain well-anchored.

Chart 3: Retail gas and diesel prices shot up in March

Chart 4: 2y breakevens rose quickly, now above 3%

What this means for bond markets

It is possible that oil disruptions prove more temporary and prices eventually ease after a few months. In that case, the Fed may eventually ‘look through’ this oil shock and refocus on underlying inflation and labour market trends. Under this scenario, limited cuts in 4Q26 remain possible, which would be supportive for bond yields. This would be broadly consistent with our preferred barbell approach across short and medium maturities.

However, oil prices could also remain elevated for an extended period – our bear case scenario. In that case, the Fed would likely stay cautious for longer. With core PCE inflation still above target (possibly >3%) - extending a streak of remaining above 2% for over 5 years -  and inflation expectations likely to remain elevated, rate cuts would become harder to justify. If growth also stays resilient, markets may begin to take the possibility of 2027 rate hikes more seriously. In this scenario, short-term bonds should hold up better than longer-duration bonds.

Final thoughts and recommendations

The main takeaway is that rate cuts now look very unlikely in the next few meetings. The Fed remains data-dependent, but heightened uncertainty means it will need more convincing evidence before easing again. We would watch especially for (i) goods inflation to moderate as a sign of fading tariff effects; (ii) oil prices to stabilise; and/or (iii) inflation expectations, including breakevens, to move back toward more comfortable levels.

Short-term bonds, especially money-market-like products, continue to offer attractive yields. With 2026 rate cuts looking less likely now, we expect these short-term yields to remain better-anchored; in other words, investors in products like 6-month USTs or money-market funds can expect to earn steady returns for little risk. These can also serve as great options for investors to temporarily park their cash amid market volatility.

Medium-term bonds remain attractive, though we continue to emphasise selectivity. The curve has normalised (bear-steepened) over March so far, meaning investors are getting greater compensation for taking on duration risks. For instance, 1-year and 2-year UST yields are now around the same levels as shorter-term (e.g. 3-month) yields, suggesting markets are perhaps already pricing in very few Fed cuts over 2026 – 2027 (Chart 5).

We include some of our top fund recommendations in Table 3 below, with shorter-duration options bolded.

Chart 5: UST yield curve

Table 3: Fund recommendations (short-duration options bolded)

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.