CITIC Securities: Hawks Hold Fire | Federal Reserve March FOMC Meeting Commentary

The Federal Reserve held steady at 11:1, with Powell explicitly stating that inflation progress is “below expectations.” Without seeing inflation progress, there will be no rate cuts. The current core inflation rate is about 3%, well above the Fed’s 2% target, with half to three-quarters of it attributed to tariffs.

Powell positioned the current interest rate as “bordering on restrictive and non-restrictive,” reducing the urgency for further rate cuts. The rate cut threshold has a dual requirement: first, confirm that inflation from tariff-related goods has peaked and is declining; only then will the Fed consider “seeing through” the energy inflation caused by the Iran war.

The policy logic shifted from last September’s “risk management” rate cuts to a “conditional dependence” wait-and-see approach, with inflation weighted more heavily than employment. We believe the window for a rate cut this year may open after September, depending on two main factors: a decline in energy prices and the absorption of tariff pass-through effects.

1. Hawkish Hold: No Rate Cut Without Inflation Progress

The Fed held steady in March as scheduled, with an 11:1 vote maintaining the federal funds rate in the 3.50%-3.75% range. The only dissent came from Stephen Miran, a Trump-nominated board member, advocating for a 25 basis point cut. Powell sent a clear hawkish signal at this meeting: inflation’s decline is “less than expected,” and before confirming a decline in energy inflation caused by the Iran war, the Fed will not consider “seeing through” it.

In the press conference, Powell admitted: “We have made some progress on inflation, but not as much as we hoped.” The current core inflation rate is about 3%, far above the Fed’s 2% target, “with roughly half to three-quarters actually caused by tariffs.”

Powell described the current inflation dilemma in blunt terms: after experiencing three waves—pandemic supply shocks, tariff pass-through, and soaring energy prices—“it’s been five years. We’ve gone through tariff shocks, the pandemic, and now face a significant and sustained energy shock. You worry this could complicate inflation expectations. Inflation has been above the Fed’s 2% target for five years, making it hard for the Fed to dismiss new supply shocks as ‘transitory.’”

Powell believes that if tariff pass-through is one-off, its impact on prices should be absorbed within 9 months to a year. But the problem is, before that absorption completes, the Iran war has added another energy shock—Brent crude oil has surged over 40% since the January meeting. Powell admits that high oil prices’ impact on consumption is “highly uncertain.”

From a policy perspective, Powell set a clear “sequence”: first, confirm that tariff-related inflation has peaked and is declining (“what really matters this year is seeing tariff-related inflation pass through the economy”), then consider whether to “see through” the energy shock. This effectively sets a double threshold for easing: “Until tariff-driven inflation is confirmed to be declining, the issue of whether to see through energy inflation will not even be on the agenda.”

Unlike last September, when labor market risks were elevated to equal weight with inflation, Powell now clearly prioritizes inflation risks. This shift in priority means that unless employment data deteriorates sharply (e.g., unemployment rising rapidly above 5%), a weakening labor market alone is insufficient to trigger rate cuts. Powell seems to suggest that the current employment slowdown is more “normalization” than “recession,” attributing it partly to supply-side factors—“partly due to reduced immigration and lower labor force participation,” leading to near-zero growth in labor supply. Even if demand softens, unemployment remains relatively stable.

2. From “Risk Management” Rate Cuts to “Conditional” Wait-and-See

We believe the current policy logic has shifted from last September’s “risk management” rate cuts to a “conditional dependence” approach. Last year, when restarting rate cuts, Powell’s core argument was that as long as the policy rate remained above the neutral level, rate cuts did not require a recession—just a roughly balanced outlook on inflation and employment. The current shift involves:

First, a significant increase in inflation risk weighting. The impact of tariffs is expected to fade over 9 months to a year (Powell estimates), but energy shocks have compounded this, making the “balanced risk” premise difficult to meet.

Second, Powell views the policy rate as being on the boundary between restrictive and accommodative, and on the higher end of that boundary, reducing the urgency for further rate cuts—since rates are already near or at neutral, continuing to cut would no longer be a “normalization” move but would require clear signs of economic deterioration.

Third, Powell’s explicit hawkish signals at the penultimate meeting (before his term ends on May 15) are noteworthy.

The hawkish tone at this meeting echoes that of March 2025. Back then, facing the first wave of tariff impacts and inflation risks, Powell also paused hawkishly, emphasizing maintaining the policy rate until inflation outlook clarified. From March 2025’s hawkish stance to September’s dovish shift, the process involved ongoing labor market weakening and initial tariff pass-through effects.

The key difference now is that last March, Powell faced only tariff shocks, whereas this time, the Iran war has added a surge in energy prices. The dual supply shocks may prolong the transition from hawk to dove and require more explicit data signals. Additionally, Powell’s upcoming departure (May 15) and the new chair’s policy leanings will add uncertainty to the outlook for the second half of the year.

We believe there may still be a rate cut window within this year, possibly after September, contingent on: (1) the Iran war’s impact on oil prices being temporary, with energy prices declining; (2) the one-off tariff pass-through effects being largely absorbed, with inflation from goods peaking and declining.

In the current macro environment, we see limited room for U.S. Treasury yields to fall. The 10-year yield may hover around 4.2% until energy shocks subside and clearer signals emerge from labor market data.

A sharp slowdown in the U.S. labor market could trigger a spiral of declining consumption and rising unemployment, leading to a significant economic downturn or recession, prompting the Fed to cut rates more aggressively than expected.

The Fed’s independence is further challenged as President Trump exerts influence over Fed officials’ appointments and pressures hawkish officials, leading to rate cuts beyond expectations.

The Iran war’s duration exceeds expectations, with the Strait of Hormuz remaining blocked for an extended period, keeping oil prices high and inflation rising sharply, forcing the Fed to hike rates.

Slowing AI investment cycles combined with rising tariffs and energy costs have led to a substantial decline in corporate profits, with tech stocks leading a deep market correction.

Research Report Title: “Hawkish Steady—Analysis of the March Federal Reserve Meeting”

Publication Date: March 19, 2026

Published by: CITIC Securities Co., Ltd.

Analysts:

Zhou Junzhi SAC ID: S1440524020001

Jiang Jiaxiu SAC ID: S1440525050001