"Hormuz Hold'em": FOMC Preview - The Fed's Playbook Is Hold or Cut, Not Hike

The FOMC is expected to leave rates unchanged at 3.50-3.75% in March. Money markets do not expect a rate cut before Q4 2026, although pricing may have been influenced by a rise in short-term yields following the recent energy price surge linked to the Iran war. Markets now fully price in one rate cut this year, compared with around two before the conflict. As Newsquawk notes, while some Fed officials have suggested they can look through one-off spikes, inflation is already well above the Fed's 2% target, which analysts say could constrain the Committee. The inflation upside comes amid renewed labor market pressure, even before the conflict. The February jobs report showed a -92k change in nonfarm payrolls, likely raising questions about stagflation at the post-meeting press conference. The Committee remains split between prioritizing the labor market and inflation sides of the mandate. Governor Waller has been vocal about labor market concerns, especially with AI now adversely impacting the job market at scale, which may guide his decision, while others remain focused on above-target inflation. Economists surveyed by Reuters expect the FOMC to cut rates in June, after Fed Chair Powell's term ends in May, despite disruption from the Middle East conflict, which has pushed up energy, metals and food crop prices. Separately, Senator Thom Tillis said the nomination of incoming Chair Kevin Warsh may remain before the Senate Banking Committee for some time due to his objections to advancing Fed nominees before the DoJ probe related to Powell concludes.

Morgan Stanley, which also expects the Fed to stay on hold in March as it debates the outlook (including the degree to which employment has stabilized, the risk higher oil prices pose for inflation and activity, and the appropriate path for monetary policy) expects the "dot plot" to continue to call for one rate cut this year and next, despite upward revisions to headline inflation from the recent rise in oil prices. This would be consistent with past practice of "looking through" oil-induced increases in headline inflation. Heading into the meeting, MS retains its outlook for two 25bps rate cuts this year in June and September. The main risk to the bank's outlook is that the median member pushes out rate normalization on account of inflation concerns; however that is unlikely "since it would run counter to past practice in dealing with oil price shocks and the softness in February employment." As such, the risk to monetary policy is asymmetric: rising oil prices amid above-target inflation is more likely to make the Fed delay cuts — or cut more when it does — than it will move to rate hikes. 

And in a note from Bank of America titled aptly enough "Hormuz Hold'em", the bank also expects the Fed to be on hold at the March FOMC meeting, and also expects limited forward guidance given elevated geopolitical uncertainty. 

Votes: The January meeting saw two dissenters, Miran and Waller, both voting for a 25bps rate cut. Commentary from Fed's Bowman has recently been very dovish, raising the risk she joins those favoring a cut. Waller said he would vote for a cut if January job strength faded in February, which it did. Miran is calling for four 25bps rate cuts this year, sooner rather than later. Elsewhere, the board and 2026 voting members lean neutral or hawkish, aside from Paulson, who has appeared more concerned about the labor market and whose vote may be one to watch. No one is calling for rate hikes, but hawks suggest policy is at or near neutral and that the Fed should be cautious on further cuts. Goldman expect three dissents in favor of a 25bp cut because that the latest labor market data will push Governor Bowman to join Governors Miran and Waller, who had also dissented in January. Morgan Stanley also looks for 3 dissents in favor of a 25bp rate cut, versus 2 in January; the bank expects Bowman to join Waller and Miran in favoring a 25bp rate cut. On March 6, Bowman said she believed the labor market could use more monetary policy support and still supports 75bp in rate cuts this year. 

FOMC Statement: According to Goldman, the FOMC statement is likely to acknowledge that the war has increased uncertainty about the outlook and is likely to raise inflation and weigh on economic activity in the near term. The statement will also likely describe activity growth as “moderate” rather than “solid.” And in light of the latest employment news, the Committee will likely modestly downgrade its description of the labor market. 

Morgan Stanley looks for minimal changes to the FOMC statement, and expects the Fed to revert back to its previous description of the unemployment rate having "edged up but remains low" rather than "shown some signs of stabilization." The bank expects the statement to retain its forward bias through "the extent and timing of additional adjustments to the target range for the federal funds rate." MS thinks the committee will be prepared to look through any rise in headline inflation from higher oil prices as opposed to reducing or eliminating guidance about further policy normalization. Elsewhere, the description of inflation as "remaining somewhat elevated" will remain, though there is some chance the statement makes a reference to oil prices having moved higher since the committee met in January. 

Summary of Economic Projections: The SEP is likely to show adverse changes to the 2026 forecasts, including higher core (+0.2pp to 2.7% Q4/Q4) and headline (+0.6pp to 3.0% Q4/Q4) inflation, lower GDP growth (-0.2pp to 2.1% Q4/Q4), and a higher unemployment rate (+0.2pp to 4.6% in Q4). These changes to the economic projections would have roughly offsetting implications for the funds rate.

Uncertainty around the SEPs is high, as forecasting during wartime is difficult and much of the economic impact depends on the duration of the conflict. US President Trump has suggested it will end soon or within a couple of weeks, though that is hard to verify. The main focus will be on the fed funds rate projections, or dot plot. The 2026 median dot is seen at 3.25-3.50%, while the 2027, 2028 and longer-run dots are seen at 3.00-3.25%. This implies one rate cut in 2026 followed by another in 2027, when rates reach the neutral level. That is broadly unchanged from the December SEP, although the neutral rate was 3.0%, not 3.125%. Inflation forecasts will be watched for clues on how policymakers expect the war to evolve, while unemployment projections will be monitored for signs of further labour market weakening (see below for a summary of expectations). Given two-way risks, some policymakers may push back rate cut expectations due to higher inflation risks linked to the war, while others may bring forward cuts after the weak NFP report. 

It its FOMC preview, Goldman expects little change on net in the dots, where the median is likely to continue to show one cut in each of 2026 and 2027. Based on comments from FOMC participants, Goldman suspects that a few will bring cuts forward in response to the latest labor market news, while a few others will push them back in response to the inflation news.

Guidance: The Fed's current guidance is based on how it will consider "the extent and timing" of further rate adjustments. This was updated in December from the previous wording, "in considering additional adjustments", to signal a pause in rate cuts. The Fed is not expected to resume cuts under Powell's leadership, while cuts under Warsh are expected to accelerate. Surveys indicate the Fed is expected to resume easing in June, despite higher energy prices from the U.S./Iran war. Around two thirds of economists surveyed by Reuters expect the Fed to lower rates by 25bps next quarter, most likely in June. Guidance is likely to remain unchanged in this statement, but any commentary on risks will be closely watched. Analyst expectations diverge from market pricing, largely reflecting the recent rise in yields.

Economy: Recent data has been mixed, with concerns about stagnation rising. Expectations had been building for a more stable labor market, particularly after a strong January jobs report. However, the weak February report renewed concerns about labor market conditions. Some reassurance may come from stable jobless claims, while JOLTS data has pared recent weakness. Inflation remains above target at around 3%, with the latest Core PCE print, the Fed's preferred gauge, rising 0.4% M/M and 3.1% Y/Y, showing little progress in recent months. Rising labour market concerns and elevated inflation, with risks skewed to the upside due to the Iran war, leave the Fed in a difficult position. However, Waller suggested it is unlikely to generate sustained inflation and said this is something policymakers may have to look through for now. Although not part of the Fed's mandate, Q4 2025 GDP growth was weak, with the second estimate at 0.7%. The Atlanta Fed GDPNow tracker currently sees Q1 2026 growth at 2.7%. Any commentary on the war will be closely watched, alongside ongoing private credit risks, with funds limiting redemptions at the usual 5% rate as requests increase.

Paths to Further Rate Cuts: Goldman recently pushed the two additional rate cuts in its forecast back to September and December. By September, the bank expects that both moderate further labor market softening and progress on underlying inflation—admittedly an increasingly murky concept with both tariffs and now higher energy costs passing through to the core—will contribute to the case for a cut. If instead the labor market weakens sooner and more substantially than expected, concern about the impact of higher oil prices on inflation and inflation expectations would be an obstacle to earlier rate cuts. The bank still sees the risks over the next year as tilted to the downside of its 3-3.25% terminal rate forecast. The FOMC could choose a slightly lower terminal rate if inflation falls to or below 2% next year, it could deliver another package of insurance cuts if a new risk arises, and it would likely cut substantially if a recession occurred. Reflecting these possibilities, Goldman's probability-weighted Fed forecast remains more dovish than both the baseline forecast and market pricing. 

Succession: Fed Chair Powell's term as chair expires in May, making the March meeting his penultimate one in the role. He may remain on the Board of Governors until his governor term expires in 2028. He is likely to face questions on his plans during the press conference, though he typically declines to comment. Former Fed Governor Warsh has been nominated to replace him, but Senate confirmation is delayed as lawmakers await the conclusion of a DoJ investigation into the Fed and Powell. If confirmed, Warsh is expected to replace the dovish Miran on the Board of Governors. If Powell leaves the Fed entirely, it would create an additional vacancy on the board.

A New Direction Under a New Chair:  With Jerome Powell’s term as chair ending in May, investors have begun to ask whether the Fed will take a new direction under President Trump’s nominee, Kevin Warsh. On interest rate policy, Warsh has been dovish in part because he has been confident that inflation is headed lower. While these views would position him on the dovish side of the FOMC’s recent debate, they would not represent a meaningful change from Chair Powell’s views. A potentially more significant change might be that a new chair is unlikely to immediately inherit the ability that Powell appeared to have to build a consensus at meetings where the data were not clear-cut and the FOMC was divided. On balance sheet policy, Warsh’s views have contrasted more strongly with those of other Fed officials. His specific proposal, to paraphrase it in the language of our financial conditions framework, is to substantially shrink the Fed’s balance sheet—putting duration back into the market and putting upward pressure on longer-term interest rates the way that a QT program would—in order to create room to simultaneously lower the funds rate, since the two actions would have offsetting effects on the overall stance of financial conditions. Goldman does not think this is likely to happen. 

Market Reaction: Below summarize several views from Goldman's US trading desk:

Rates

Brian Bingham – Short Term Interest Rate Trading: The inflationary VaR shock priced into EUR & GBP front end spilled over into USD whites in full force last week, with sfrz6 cheapening >50bps peak to trough and terminal pricing through Dec FOMC breaching a new cycle low of 20bps through year end. Even more pronounced than the delta move was aggressive richening of put skew, manifesting as the ultimate pain trade in $ front end for broadly consensus short left tail distributional trades (put 1x2s, payer ladders etc). There are no certainties in this world, but of all the tails to sell, the far and away most palatable expression is fading hikes in SFRM6. Irrespective of one’s view on Warsh’s chairmanship, the *one* scenario we view as least likely is a hike at his very first meeting in June. Could hikes transpire down the road, if oil stabilizes above $100/bl and capex deployment buffers any corresponding growth shock? Unlikely, though certainly not impossible. But the burden of proof needed for Warsh to hike straight out of the gate – now priced at close to 10% probability – would require a deterioration that is difficult to even fathom, much less proactively bet on. 

Mitchell Cornell – Volex Trading: The market has experienced a lot of gyration leading into this fomc, with direction central bank expectations taking a back seat to geopolitics and forward looking inflation expectations. This bout of volatility in macro markets started 3 weeks ago with AI productivity fears for the labor market, and turned quickly to the prospect of a quick pick up inflation with the rise in energy prices from the conflict in Iran. Our franchise has continued to be better buyers of receivers in 1y1y and 2y1y type forwards into the back up in yields. However, payers have richened materially on basically all forwards as the market quickly turned to a yields higher vol higher bias. We are looking for the FOMC to either provide the market with some calm about the prospects for easing, or perhaps exhibit caution about the forward path of inflation. Either way, will be good for the market to hear from central bankers this week after the blackout period amidst stress conditions.

FX: 

Lexi Kanter – FX Research: Geopolitics remains the main driver of markets, but in recent days the focus has shifted between 1) the inflation and immediate terms of trade implications and 2) rising recession risk. For the Fed, our economists think the current backdrop increases both the risk that earlier rate cuts will be needed to address labor market softening and the risk that a higher inflation path will delay cuts; they recently pushed back their expectation for cuts to September and December (vs June and September previously). Overall, we expect the tension between the impacts on inflation and growth to mostly reinforce the current wait-and-see stance and is likely to keep the committee split on the appropriate path forward. That said, markets will likely focus on the relative emphasis on the two aspects of the Fed’s dual mandate, which should dictate the near-term FX implications. Relatively greater weight on inflation concerns should allow markets to price in slightly more hawkish near-term policy and first order terms of trade implications, which should be most positive for the Dollar alongside AUD, CAD, and BRL. Alternatively, should there be more emphasis on the labor market and higher recession risk, JPY would likely become the clearest outperformer despite the more negative terms of trade implications of the current energy price shock.

Mark Salib - G10 FX One-Delta Trading: The desk is currently on dissenter watch heading into FOMC. The view is that the current environment may warrant a dovish tilt, particularly as the focus shifts more toward growth over inflation. The desk likes owning the EUR vol via delta hedged puts, but without follow through on the likes of equities, do not want to unwind EUR shorts. Furthermore, beyond FOMC, we can't neglect risks of the front-end US repricing at a fast pace. Overall, our traders are long USD, but with reduced deltas.

Equities: 

Vickie Chang – Macro Research: This week, we expect the Fed to leave the funds rate unchanged and to note the increased uncertainty about the economic outlook as a result of the war and the oil price shock. The path for interest rates going forward hinges more on how those uncertainties resolve than on this FOMC meeting. If the market worries more about the growth risks from higher oil prices or if the labor market weakens more substantially, then the market is likely to price further easing. We think the risks are tilted towards lower yields from here—the market has largely priced a hawkish inflationary/policy shock since the start of Iran war, and if that reverses as the market either worries about growth or relaxes about the policy shock, then there is room for yields to fall. But because the path there might involve higher oil prices, our rates team favors holding that long exposure in a limited risk format. Given the potential downside risk to risk assets if the market does price a negative growth shock from here, we think it also makes sense to use periods of relaxation to hedge deeper downside scenarios. 

Heading into Powell’s penultimate FOMC, the focus of equity vol traders has been mainly focused on geopolitics and the war in Iran. The interesting passthrough effect is whether the recent spike in energy prices leads to a more cautious/hawkish dot plot out of the FOMC on Wednesday. Vols remain elevated in the front and the one day SPX straddle for FOMC looks like it will go out roughly 85 bps. One interesting wrinkle is that VIX expiry is the morning before FOMC, and we think this could free up SPX spot to move somewhat  as the pressure of imminently delivering one month variance is removed from the market. We think long topside makes more sense than long downside options given elevated levels of skew, and like owning NDX options more than SPX options with the spread very low in the front of the curve. While Powell’s commentary becomes less relevant as he approaches the end of his term as chair, we do think a hawkish dot plot could potentially spook markets lower when combined with uncertainty out of Iran. 

Credit: 

Usman Omer – Index Trading: Since last FOMC, credit spreads have traded in a wider range with an uptick in realized volatility, driven by (1) macro weakness, a reignited stagflation tail and geopolitical uncertainty, (2) hyperscalers issuing an unprecedented level of debt, and (3) concerns around private credit, especially as it pertains to software companies. Over the last few sessions, credit beta has attached, realizing both outright implied breakevens and vs spx vol. Even on green days, squeezes in credit have felt particularly violent. At these wider refs, RM accounts have trimmed hedges while we have also seen a variety of accounts sell Vol (both Vol RV and RM setting longs). On the other side, we are continuing to see hedge setting both in one delta and in Vol space, notably by X-asset and Equity accounts. Thematically, CDX HY has starkly underperformed IG on the private credit and growth deterioration thesis. On the ETFs front, borrow has stretched and positive rates risk correlation to the downside has contributed to LQD and HYG selling off in all in price. While these new, wider refs may be the new zipcode for spreads for the forseeable future given structural changes in demand and supply, credit is taking its cue from broader macro and a worsening growth inflation tradeoff will mean a further increase in risk premium for credit.

Commodities: 

Marvin Wallez – Investor Products Trading: At this point for precious metals and copper, sessions have been very correlated to other macro assets. In particular, correlations to equites and rates has picked up as all eyes are riveted on the Middle East and the market almost fully took off the rates cuts for 2026. Gold suffered from liquidations as it often does under these risk off moves, but tail scenarios all seem favorable for gold.  Aluminum has caught a bid as 10% of the global supply goes through the straight. Stockpiling of aluminum, however, should be limited and restart time for facilities can take months. Nonetheless, we think that the meeting will likely be a non-event for metals unless we feel a strong dovish stance out of it that is sufficient to have cuts come back into play. A slow approach to the conflict like we’re seeing could continue to hurt gold longs locally, but we remain of the view that the market positioning is much healthier in metals, Eastern demand is there, as you can observe looking at Asia sessions, and that the ride, especially in gold, is ready to resume if we see the conflict improving. 

Much more in the FOMC preview folder available to pro subs.