Fed Holds Rates Steady, Projects One Rate Cut in 2026 | Balance of Power 03/18/2026

Summary

• The Federal Reserve held rates steady, projecting one rate cut in 2026, citing increased uncertainty from the war in the Middle East and the need to see more progress on inflation before easing.
• Fed Chair Powell emphasized a cautious, data-dependent stance, stating the SEP should be taken "with a grain of salt," and addressed the ongoing DOJ investigation, indicating he will stay until its conclusion.
• A potential constitutional and legal standoff is noted if Powell's term ends before a replacement is confirmed, with ambiguity over who would serve as Acting Chair.
• The conflict with Iran has caused an oil price shock, complicating the Fed's outlook. Each $1 increase in oil translates to ~2.5 cents at the pump, acting as a significant tax on consumers.
• Joseph Lavorgna argues underlying U.S. fundamentals are strong (productivity, pro-growth policies) but the oil shock poses a serious risk. The Fed, having been burned by inflation before, is reluctant to cut.
• Lavorgna outlines a threshold: a few weeks of high oil prices is manageable; a few months would weaken consumer confidence and spending, potentially forcing the Fed to cut to avoid a recession.
• Stagflation (with a small 's') is a risk if growth slows to ~1% while CPI remains at ~4%, which would hurt financial markets (steeper yield curve, lower equity prices).
• UK's initial reluctance to support the U.S. in the Iran campaign damaged alliance confidence, compounded by a hollowed-out military, leaving it unable to project power or protect its sovereign base in Cyprus.
• The UK economy is vulnerable with near-zero growth, a high tax burden (38.3% of GDP), and poor energy policies (not utilizing North Sea oil/gas, expensive net-zero spending).
• Iran's asymmetric warfare is effective, targeting critical energy infrastructure across the Gulf and threatening the Strait of Hormuz, with no near-term risk of running out of missiles/drones.
• The cost of the war is high for the U.S., with millions spent on missile defenses. A supplemental funding request is expected, but there is a push to offset it by cutting fraud and waste.
• The confirmation of Markwayne Mullin as DHS Secretary is likely, despite tense hearings, and policy is expected to continue the shift seen under acting secretary Tom Homan, focused on immigration enforcement.
• Political dynamics show Republicans willing to break with President Trump on certain issues (e.g., Iran war), and Democratic primary results in Illinois suggest an absolutist position on Israel is a liability.