The US Federal Reserve is expected to hold US rates at 3.5% – 3.75% tonight as it tries to chart a precarious path through the ongoing conflict in the Middle East.
Since the US and Israel launched the war on Iran, oil prices have been extremely volatile and the price of a barrel has surged well above $100.
The feed-through to energy prices is highly inflationary, so Jerome Powell and his fellow FOMC members are expected to tread carefully as the finish line to his spell in the job comes into sight.
The health of the US and global economy is largely out of the Fed’s hands at the moment, with the war and its impact on shipping access to the Strait of Hormuz being the dominant factor in global energy markets.
This week’s meeting is Powell’s penultimate, with just the April get-together to come before he departs in May and is replaced by Donald Trump’s pick, Kevin Warsh.
Front-running the Fed decision will be this afternoon’s US inflation update. The figure has remained stubbornly above the Fed’s 2% target and investors will be watching closely for any signs of a resurgence.
Markets are currently pricing in a year of largely treading water for the Fed with only one further cut expected, but this could quickly change if there are any big surprises in jobs or inflation data.
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Emma Wall, chief investment strategist at Hargreaves Lansdown, said: “Economic news is the order of the day across the pond as the we get both an inflation print and the Federal Reserve’s FOMC concludes its March meeting.
“They may be meeting stateside, but whatever the Fed says today will have global implications.
“The US Producer Price Index inflation report for February will be released today, but will not reflect elevated oil prices, so is expected to show month on month increase of 0.3%, in line with longer term trends.
Wall added that data for the month of March will be more revealing, including recent oil and gas shocks.
Victoria Scholar, head of investment at interactive investor, said: “In the US attention turns to tonight’s interest rate decision from the Fed, with the central bank most likely to keep rates unchanged for the second straight meeting given the uncertain outlook around inflation since the start of the Iran war.
“Focus will be on its economic forecasts with the potential for a higher inflation and lower growth expectations in light of the Middle East uncertainty. After two days of declines the dollar is trading flat and US futures are pointing higher, on track to extend yesterday’s gains.”
