Fed Leaves Rates Unchanged as Expected, What Signals Did Powell Send at the Press Conference? Has the Market Overinterpreted Powell’s Remarks?

TradingKey - On March 18, Eastern Time, the Federal Reserve kept interest rates steady as expected, maintaining the federal funds rate target range between 3.5% and 3.75%. At the press conference, Powell stated that U.S. inflation remains sticky and that rising uncertainty in the outlook is disrupting the pace of disinflation.

The market appears to have over-interpreted Powell's remarks.

According to the dot plot, there was significant internal disagreement within the Fed in December 2025 regarding policy for 2026. Although the median suggested the market expected only one rate cut in 2026, some officials even believed there was room for potential rate hikes.

However, in the March dot plot assessing 2026 policy, the positions of Fed officials weakened the assessment for rate hikes.

Previously, Powell stated that the committee had begun discussing "whether a rate hike might be the next step," and although this is not the baseline scenario for most officials, the remark was seen as hawkish.

TradingKey believes these remarks appear to have been over-interpreted by the market. In the December dot plot, we could still see some officials assessing rate hikes, indicating internal support for the idea. Although Powell made statements regarding rate hikes this time, the dot plot showed no clear consensus. From this perspective, the phenomenon actually represents a dovish shift by the Fed as a whole.

In addition, Powell reiterated at the press conference that labor demand has cooled significantly, though the unemployment rate has changed little since last summer. He added that past rate cuts should help stabilize the labor market.

Powell broke from his usual routine. By not focusing on the disappointing non-farm payroll data or other employment figures, it suggests that the labor market—which the Fed had previously emphasized—has decreased in relative importance, implying that the Fed believes the labor market currently possesses a degree of resilience.

Multiple factors keep U.S. inflation stubborn.

Regarding inflation, Powell stated that while U.S. inflation has retreated from its mid-2022 peak, it remains high relative to the 2% target.

Data showed that as of February, the headline PCE price index rose 2.8% year-over-year, while core PCE, which excludes volatile food and energy, increased 3.3%. The higher readings partly reflected rising inflation in the goods sector due to the impact of tariffs.

He noted that short-term inflation expectation indicators have risen in recent weeks, likely reflecting oil price volatility, while long-term inflation expectations remain broadly consistent with the 2% target. The median inflation forecast is 2.7% for this year and 2.2% for next year—both slightly higher than the December forecasts—but the Fed's projections indicate optimism regarding long-term economic resilience.

Regarding the energy spike caused by the Middle East, Powell stated that based on historical experience, energy shocks are typically "looked through." However, this always depends on whether inflation expectations remain anchored. He added that there has not yet been significant progress in controlling inflation, suggesting that Powell still views the inflation problem as severe.

Furthermore, Powell believes that while inflation will continue to improve, the pace of improvement may slow down. This is primarily reflected in the gradual pass-through of tariff impacts, with tariff-driven inflation starting to recede. Powell stated that a series of prior shocks interrupted the progress the Fed had been making in fighting inflation, emphasizing that rate cuts are contingent upon the Fed seeing improvement in inflation.

Concerns over Fed independence ease.

Previously, Trump's interventions repeatedly raised market concerns about whether the Fed's independence was under threat, as he frequently stated in public his preference for choosing a dovish figure as the new Fed chair.

Conversely, Kevin Warsh, the new Fed chair-in-waiting appointed by Trump, is widely regarded by the market as a hawk.

Powell stated that if his successor has not been confirmed by the end of his term as Fed chair, he will continue to serve as "interim chair" until a successor is officially confirmed. This provided some relief to market concerns over the Fed's independence.