Fears of rising inflation keep Fed on hold

Highlights: At its March meeting, the Fed again left the policy rate unchanged at 3.50 per cent – 3.75 per cent and signalled a clear “wait-and-see” stance. Resilient growth, persistent inflation and rising geopolitical risks have created uncertainty for Fed members. We maintain our view that they will keep rates unchanged throughout 2026 and 2027. For now, volatile energy prices and geopolitical risks should continue to support safe-haven demand and USD. We stay neutral on UST given range-bound yields, while favouring IG corporate bonds for attractive carry and EM local currency debt for diversification. We maintain an overweight on US and global equities, supported by strong earnings and structural tailwinds, as US stagflation risks remain low in spite of the conflict. We complement this with allocations to gold and alternatives to manage volatility and to diversify our diversifiers.

• Despite a widely expected hold, a less dovish-than-anticipated Fed tone triggered an initial risk-off reaction in US markets, with equities declining and bond yields moving higher as rate cut expectations were scaled back. This weakness carried into Asian markets, where declines were broader and more pronounced in oil-sensitive economies, reflecting the combined impact of Fed spillovers and rising energy prices
• The March FOMC meeting reinforced a clear message that the Fed is patiently waiting, and it does not yet see a clear path forward. The combination of resilient growth, persistent inflation, and rising geopolitical uncertainty has created a situation where policymakers cannot yet prioritise one side of their dual mandate over the other
• Inflation risks have moved higher, particularly due to energy prices, while labour market risks have shifted modestly to the downside. The result is a policy stance that is deliberately prudent and highly dependent on how these competing forces evolve moving forward
• Inflation remains the key constraint, with forecasts revised higher and policymakers are not yet confident that disinflation is back on track. Growth continues to hold up, supported by resilient consumer spending and investment, reducing the urgency for rate cuts
• The labour market is stable but softening beneath the surface, with very low job growth and emerging downside risks. A key source of uncertainty for the Fed and other central banks relates to the conflict in the Middle East and to the associated surge in energy prices since the beginning of this month. The spike in energy prices, gasoline prices in particular, is likely to lead to a jump in inflation, while also reducing the purchasing power available to consumers for spending on non-energy goods and services. Our view remains that the FOMC will keep the federal funds target range unchanged in 2026 and 2027