'Hawkish hold?'…FOMC faces more complex calculus amid Iran war [Analysis+]

March FOMC to be held March 17–18 (local time)

'Rate hold' seen as the base case

"Cautious about rate cuts amid rising oil prices"

The U.S. central bank, the Federal Reserve, will hold the March meeting of the Federal Open Market Committee (FOMC) on March 17–18 (local time) to decide on interest rates. It will be the first meeting since the outbreak of the U.S.-Iran war. With the Fed increasingly sensitive to inflation data, some analysts say it could send a hawkish (tightening-leaning) signal, citing a surge in global oil prices.

According to CME Group’s FedWatch, which reflects market expectations for Fed monetary policy as of the 17th, the market is pricing in a 99.2% probability that the Fed will keep its benchmark policy rate unchanged at the current annual 3.5–3.75% range at this FOMC meeting. Just a week ago and a month ago, the probabilities were 96.5% and 90.8%, respectively, with the odds of a hold rising as the meeting approaches.

Within the Fed, a more cautious tone toward rate cuts is being detected. With global oil prices surging since the Iran war, inflationary pressure could intensify.

Inflation readings released so far have remained relatively stable. The February Consumer Price Index (CPI), released in March by the U.S. Bureau of Labor Statistics, rose 2.4% year on year, broadly in line with market expectations. Core CPI also increased just 2.5%. However, those figures reflect prices from before the war.

Labor-market data are not favorable. February nonfarm payrolls, released this month by the U.S. Bureau of Labor Statistics, came in at minus 92,000, far below market expectations, while the unemployment rate rose to 4.4%. While the jobs picture argues for rate cuts, analysts say inflation concerns make it difficult for the Fed to reach for the rate-cut card prematurely.

Kang Seung-won, a researcher at NH Investment & Securities, said, "Because this meeting is being held amid the war, Fed officials’ outlook will inevitably vary depending on whether (the war) becomes protracted," adding, "Rather than signaling whether they are hawks or doves (favoring easing), it is highly likely they will make general remarks along the lines of watching how the war unfolds."

Won Yoo-seung, a researcher at SK Securities, said, "The dot plot is likely to keep its median broadly unchanged, but divisions in views could widen further," adding, "Given that this is a moment that calls for vigilance, even if the Fed holds rates, a hawkish shift in the details is expected."

Major global investment banks (IBs) also continue to expect two rate cuts this year, but are pushing back the timing.

Goldman Sachs, which had initially expected two rate cuts in June and September, pushed its rate-cut call back to September and December in a report on the 12th. Morgan Stanley maintained its existing forecast of two 0.25%-point rate cuts in June and September, but added a caveat that the oil shock from the Iran war could lead it to delay the first cut this year to September or December.

That is because inflation indicators that have been underpinning the Fed’s easing bias are decelerating, but more slowly than expected.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is facing some upward pressure. The January PCE price index, released by the U.S. Department of Commerce, rose 2.8% year on year, while the core PCE price index increased 3.1% year on year. The headline measure slowed from the prior month (2.9%), but the core measure accelerated compared with the previous month (3.0%).

Won said, "PCE inflation indicators are showing a rebound, increasing the Fed’s sense of caution," adding, "Core PCE inflation running more than 1% point above the Fed’s 2% target is a factor fueling concern."

Roh Jeong-dong, Hankyung.com reporter dong2@hankyung.com