Fed Holds Rates Steady for Second Time... Uncertainty from Tariffs and Iran War Persists

U.S. Economy Still Robust... GDP Revised Up to 2.4%
Fed Dismisses Stagflation Concerns
Job Growth Slows but Unemployment Remains Stable
Inflation Remains High... Tariff Impact Persists
Oil Prices Surge Due to Iran War
Short-Term Inflation E

Jerome Powell, Chair of the Federal Reserve (Fed)

The U.S. Federal Reserve (Fed) kept its benchmark interest rate unchanged for the second consecutive time on March 18 (local time). This decision comes as inflation remains above the Fed’s target, even as the labor market shows signs of slowing. In particular, concerns over inflation have grown due to price increases stemming from tariff policies under the U.S. President Donald Trump administration, as well as surging energy prices caused by war, which further supported the decision to maintain rates.

The U.S. Economy Remains Resilient...Inflation Pressure Persists Amid Slowing Employment

On this day, the Fed announced after its Federal Open Market Committee (FOMC) meeting that the federal funds rate would remain at 3.5–3.75% per annum. This marks the second straight meeting in which rates have been frozen, following the FOMC’s decision in January. The interest rate gap between Korea and the U.S. will thus remain at a maximum of 1.25 percentage points.

In its statement, the Fed noted, "Job growth remains at a low level, and the unemployment rate has not changed significantly in recent months," adding, "Inflation is still somewhat elevated."Although recent employment indicators have slowed, the stable unemployment rate means there is insufficient justification for easing monetary tightening.

The main issue is inflation.This year, personal consumption expenditures (PCE) are expected to rise to 2.7%, which is 0.3 percentage points higher than the forecast made in December last year. The core PCE forecast was also raised to the same level. However, the projected unemployment rate remains unchanged at 4.4%.

According to the Summary of Economic Projections (SEP), the U.S. economic growth rate for this year is projected at 2.4%, up 0.1 percentage point from 2.3% in December last year. Jerome Powell, Chair of the Fed, explained that the outlook was raised due to increased confidence in productivity.

The so-called "dot plot," which drew significant attention from the market, projected a median federal funds rate of 3.4% at the end of this year. This is the same as the December forecast, indicating that the Fed is expected to cut rates once within the year. However, as some committee members lowered their outlook from "two cuts" to "one cut," a trend toward reducing the number of rate cuts was confirmed.

In this decision, 11 out of 12 FOMC voting members supported holding rates steady. Only Fed Governor Stephen Miran dissented, advocating for a 0.25 percentage point rate cut. He is known as a close associate of President Trump and has consistently called for rate cuts.

Trump’s Tariffs Still Weigh on Prices...Uncertainty from Iran War Adds to Concerns

Chair Powell repeatedly highlighted the uncertainties caused by both tariffs and the Iran war. During the Q&A at the press conference, Powell stated, "The most important development this year has been inflation arising from goods inflation," adding, "I would like to see the temporary inflation caused by (the Trump administration’s) tariffs disappear. Overall, there has been no progress when looking at all indicators."

The U.S. Producer Price Index (PPI) for February, released prior to the March FOMC press conference, supports this view. The PPI for February rose 0.7% month-on-month, far exceeding the market expectation of 0.3%.

Service prices rose 0.5% compared to the previous month, driving overall inflation higher. This increase was broad-based, covering areas such as travel, finance, and distribution. Notably, asset management fees rose by 1%, while prices for financial services such as securities brokerage and investment advisory surged by 4.2%. In other words, domestic service price inflation continues unabated.

Persistent service inflation remains a problem. Inflation driven by wages and demand is continuing, and this is the type of inflation the Fed dislikes most.

The mention of the Iran war was also noteworthy.In its statement, the Fed said, "The impact of the situation in the Middle East on the U.S. economy is uncertain."

The phrase most frequently repeated by Chair Powell at the press conference was "We don’t know." He noted that it is currently impossible to be certain how long the Iran war will last, whether supply chain shocks will spread, when the impact of tariffs will dissipate, or how high international oil prices will rise.

While emphasizing uncertainty, Powell also suggested that volatility in the energy market stemming from U.S. and Israeli attacks on Iran is affecting monetary policy. Powell said at the press conference, "In recent weeks, short-term inflation expectations have risen, which appears to reflect the surge in oil prices caused by supply disruptions in the Middle East."

This content was produced with the assistance of AI translation services.