Certain There’s More Uncertainty

The Federal Open Market Committee (FOMC) did not change its benchmark interest rate Wednesday — no news there. And if you were hoping for any definitive statement on whether the Iran war changes the expectations for the year, sorry, all we got was a simple statement that it raises uncertainty.

The one place where we got some clearer messaging was in the updated Summary of Economic Projections (SEP) and dot plot.

The Fed’s projection for real GDP growth has gotten progressively stronger since September of last year and is now up to 2.4% for 2026. That’s a clear positive sign: Expectations for improving growth indicate an economy that officials view as healthy and resilient.

The inflation projection is also higher than last time, which is more in-line with stronger GDP, in my opinion. (Frankly, the tick down in inflation expectations at the Fed’s December meeting was a headscratcher for me, and has had me a bit unsettled ever since.) That’s not to say I want inflation to be higher. I don’t. But I do want the projections to be consistent with one another. Stronger GDP is more likely to result in higher inflation, not lower.

That said, inflation was already running above the Fed’s 2% target and on Wednesday Chair Jerome Powell acknowledged that progress on inflation has been less than he hoped. The recent spike in oil prices makes this an even more difficult situation for the Fed.

It also makes things more difficult for the market, since sticky or rising inflation makes rate cuts less likely. As of this writing, fed funds futures still show a ~70% probability of one cut in 2026, but that’s down from the expectation of two full cuts just a few weeks ago.

Despite the fact that a fresh SEP was issued Wednesday, it was clear in Powell’s press conference that the FOMC is very uncertain about the projections and how things might develop over coming weeks. At one point Powell even joked, “If we were ever going to skip an SEP, this would be a good one.”

Dotted Lines

Interestingly, the increased level of uncertainty seems to have resulted in tighter consensus among the committee members. The dispersion in the dot plot was considerably smaller compared to the December meeting, yet the projected fed funds rate at year-end didn’t change from 3.4% (one cut from current levels).

I would take this with a grain of salt though, since it could change considerably by the next update in June. It appears that the FOMC considers current rate levels reasonable given everything that’s going on. Officials seem reluctant to say or do much of anything until we have more clarity on the duration and severity of the oil price shock.

All About Growth

For the rest of the year, it all comes down to economic growth.

In keeping with the higher level of uncertainty, the Fed raised its estimate of growth for the year, but also indicated higher uncertainty (left chart) and risks to the downside (right chart) compared to December. Much like the dots, this could change very quickly depending on how the next couple months of news and data materialize.

Although the Fed doesn’t target GDP growth, it is a core metric in their economic models, tightly linked with inflation and labor over medium-term periods.

Given all of the unknowns, this Fed statement was perhaps the most ambiguous one I can remember in a while, and that’s not because there was poor communication. It’s because this is an impossible situation to predict.

The next Fed meeting is on April 29, which feels like an eternity from now. We won’t have a new Fed chair by then, but hopefully we’ll have some clarity or resolution on the Iran war. We won’t get another SEP and dot plot until June 17, so we’re stuck with this inconclusive set of projections for now. This is a challenging set of circumstances for markets, without a doubt.

Although patience, prudence, and fundamentals should always be the main pillars in every investor’s strategy, they’re especially important right now.

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