Here's What the Fed Is Leaning Toward in Its March 17-18 Meeting

Setting monetary policy to maximize employment while also keeping prices stable -- the Federal Reserve's dual mandate -- is difficult during the best of times. Before last week, the Fed was already in a tough situation, with knock-on effects for the stock market.

Recent measures of inflation indicate it remains stubbornly above the Fed's 2% annual target. The core Personal Consumption Expenditures price index for December increased 3% over the same month a year earlier. The Fed has been hoping it would have drifted down to close to 2% by now. So inflation remains too high. (We will get another PCE index reading this Friday.)

Meanwhile, the labor market is clearly slowing. Last week brought the employment report for February, and it was extremely disappointing. The economy lost 92,000 jobs during the month, and the jobless rate ticked up to 4.4%. So employment is going the wrong way.

Fed officials have been candid about the difficulty of their situation. "If the job market is getting worse and inflation is getting worse at the same time, it's not obvious to me what the immediate response should be," Federal Reserve Bank of Chicago president Austan Goolsbee said last week.

Rising oil prices are a double whammy for the Fed

But things just got much worse for the Fed. The price of oil is now spiking due to the war in the Middle East. As I write this on March 9, the price of Brent crude, the international benchmark, is about $98 per barrel. That's about $27 higher, or 38% higher, than the price the day before the conflict began.

Rising energy prices are a double-whammy punch for central banks. They have the potential to both slow the economy and increase inflation. So the Fed is suddenly in even more of a quandary: If it cuts its target rate to boost employment, that will risk sending inflation, already too high, even higher. If it decides to hike its target rate to combat sticky inflation, it risks a further deterioration in the labor market.

Image source: Getty Images.

As a result of this situation, the Fed's interest rate-setting committee is widely expected to do nothing when it meets for two days next week on March 17–18. The futures market currently assigns a 97.4% probability that the Fed will stand pat, leaving the target interest rate exactly where it is. Just a month ago, that probability was about 83%, so futures traders are growing more confident that the Fed will not alter its rate at next week's meeting.

That's unfortunate for investors, many of whom were beginning to believe the Fed might cut its target rate two or even three times this year. Suddenly, however, futures markets are expecting just one cut this year. Rate cuts almost always boost the stock market, as lower borrowing costs are great for companies' bottom lines as well as for consumers.

So 2026 is starting to look like a tougher year for the market than previously expected.

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