The Federal Reserve held rates steady, but continues to project 25bp rate cuts in both 2026 and 2027 as they seek to optimise policy to deal with upside price risks from energy, set against a jobs market that has cooled and faces more headwinds, XXX told clients Wednesday.

There is nothing particularly surprising from the Federal Reserve outcome. A "no change" decision with a target range of 3.5% to 3.75% with only Stephen Miran dissenting by voting for a 25bp cut. Everyone else wanted stable rates, but the Fed continues to think a rate cut this year is more likely than not. The Fed appears prepared – for now – to look through a near-term energy price shock, believing that this won't become a broader, more persistent inflationary problem that needs action.

The accompanying statement acknowledges that "uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain". Chair Powell also heavily emphasized the problems with making projections in the current challenging situation, but he believes economic activity remains “solid”. For now, though, the updated forecasts show they have retained the 2026 rate cut they had from their December update and continue to have a further 25bp rate cut in 2027.

Interestingly, they have revised up GDP growth a touch for fourth quarter 2026 to 2.4% year-on-year versus 2.3% while their fourth quarter 2027 GDP growth prediction is now 2.3% versus 2.0%. 2028 is also up, while, perhaps most significantly, the Fed revised its long run GDP projection to 2% from 1.8%, suggesting they are buying into the productivity boosting effects of AI/technology investment.

After all, their inflation forecasts have only been revised a little higher for this year (2.7% vs 2.5% previously for the core PCE deflator in fourth quarter 2026 with fourth quarter 2027 0.1 percentage point higher at 2.2% with 2% retained for 2028. Unemployment forecasts are little changed with long run Fed funds revised up 0.1pp to 3.1%.