The Federal Reserve will not agree to a war in Iran, which complicates interest rate cuts

The United States Federal Reserve (Fed) announces its decision on interest rates on Wednesday, AND key meeting for markets to assess the stance of the world’s most vital central bank after an energy shock that could threaten the Fed’s dual mandate. While a major decision on interest rates is a foregone conclusion, oil prices have soared following the Iran war adds a layer of uncertainty this could make this meeting much more intriguing – and more volatile for markets – than initially expected.

Markets widely expect this from the Federal Open Market Committee (FOMC). keep the main interest rate unchanged second meeting in a row in the range of 3.5%-3.75%.

With this decision almost fully factored into the price, the Summary Economic Outlook (SEP) and Fed Chairman Jerome Powell’s comments at the post-meeting press conference may have an impact on the US dollar (USD).

This is demonstrated by the CME FedWatch Tool investors see virtually no chances for a rate cut neither in March nor in April, estimating a probability of over 75% of the continuation of the next monetary policy in June. In fact, markets currently expect only one interest rate cut this year, large change compared to three cuts expected before the outbreak of the war in Iran.

What has changed? The Fed will conduct its meeting within extraordinary circumstances as rising oil prices due to the closure of the Strait of Hormuz due to the ongoing war between the United States (US) and Iran enhance uncertainty about the inflation outlook.

DBS Group economist Philip Wee argues that the Fed enters its March 17-18 meeting between rising energy-led inflation and weakening US economic growth.

“Fed Chairman Jerome Powell may still be the one haunted by the specter “around the bend”. from 2022, when a delayed response to rising prices forced a painful, aggressive cycle of price increases,” notes Wee. This time, however, the Fed fragile economy– he adds, citing the downward revision of gross domestic product (GDP) growth in the fourth quarter and the decline of 92,000 recorded in February in the non-farm payroll (NFP) rate.

“The FOMC has to make a decision whether these spikes in energy prices constitute a major inflation threat requiring higher rates or a consumer tax requiring reductions,” Wee concludes.

Economic indicator

Fed’s interest rate decision

The Federal Reserve (The Fed) deliberates on monetary policy and decides on interest rates at eight previously scheduled meetings per year. It has two tasks: to keep inflation at 2% and to maintain full employment. Its main tool for achieving this goal is setting interest rates – both those at which it lends to banks and those at which banks lend to each other. If it decides to enhance interest rates, the US dollar (USD) will strengthen as it attracts a greater inflow of foreign capital. If it cuts interest rates, it will typically weaken the dollar as capital flows to countries offering higher yields. If rates remain unchanged, attention will focus on the tone of the Federal Open Market Committee (FOMC) announcement and whether it will be hawkish (expecting higher interest rates in the future) or dovish (expecting lower interest rates in the future).

When will the Fed announce its interest rate decision and what impact may it have on EUR/USD?

The Fed is expected to announce this decision decision on interest rates and publish a monetary policy statement together with the SEP, at 18:00 GMT. It will happen Press conference of Fed Chairman Jerome Powell starting from 18:30 GMT.

The rate decision itself is unlikely to trigger a significant market reaction, but investors will be closely watching the tone of the SEP and Fed Chairman Powell.

The latest SEP, published in December, showed that the central bank’s projections showed that: 25 basis point (bp) interest rate cut in 2026and another 25 basis point cut in 2027.

Additionally, Fed policymakers’ projection for PCE inflation at the end of 2026 fell to 2.4% from 2.6% in the September SEP report. Given the recent surge in oil prices, Fed officials will likely indicate higher inflation to come.

The CME FedWatch Tool indicates about a 30% chance that the policy rate will remain unchanged in the 3.5%-3.75% range at year-end. Where the scatterplot highlights that most policymakers prefer to keep policy unchanged through the end of 2026, barring an upward revision to the end-2026 PCE inflation projection, the USD he could gather his strength with an immediate reaction and weighed heavily on EUR/USD.

Conversely, the US dollar could come under bearish pressure and allow EUR/USD to gain strength if the SEP shows at least one 25 basis point rate cut this year.

As markets digest the policy statement and SEP plan, they will focus on Powell’s momentous statement, which will likely focus on fears of a revival in inflation and his future at the Fed.

If Powell suggests they will have to the priority is to control inflation and inflation expectations due to rising oil prices, this could confirm expectations for an unchanged interest rate for longer and support the USD. On the other hand, the US dollar is likely to lose interest if Powell does not press the panic button, noting that he will need more time to assess how the US-Iran conflict may affect inflation dynamics and that he will need to pay more attention to the labor market situation and support economic growth after the piercing decline in February’s NFP.

“Powell will do this carefully avoid giving any strong forward-looking signals and emphasize the two-sided nature of the risk arising from an energy supply shock,” said the Danske Bank Research Team.

“Most FOMC participants continue to view the current interest rate level as slightly above neutral, and as energy uncertainty eases, we expect the Fed to ultimately deliver two more rate cuts in June and September” – they add. “Prolonging uncertainty may push the expected reductions into the future, but not erase them completely, which, as we expect, will also be reflected in the updated dots,” the analysts conclude.

Eren Sengezer, Chief Analyst for the European Session at FXStreet, presents the near-term technical outlook for EUR/USD:

“The short-term technical outlook indicates this growing bear pressure. The 20-day simple moving average completed a bearish cross with the 50-day SMA and recently broke below the 100-day and 200-day SMAs. Additionally, the Relative Strength Index (RSI) remains below 40 after slightly bouncing from the oversold area below 30.”

“On the other hand, 1.1380 (38.2% Fibonacci retracement level in the 2025-2026 uptrend) is a key support level ahead of 1.1170 (50% Fibonacci retracement level). In case EUR/USD reaches the 1.1660-1.1700 area where the Fibonacci retracement is 23.6%, the 100-day SMA and The 200-day SMA forms powerful resistance, technical buyers could take action. In this scenario, the 1.1900 level (round level, immobile level) could be seen as another technical obstacle.

Frequently asked questions about dot plot

“Dot Plot” is the popular name for interest rate projections made by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. They are published in the Summary of Economic Projections, a report in which FOMC members also provide their individual forecasts regarding economic growth, unemployment rates and inflation for the current and several next years. The document consists of a chart showing interest rate projections, with each FOMC member’s forecast denoted by a dot. The Fed also adds a table summarizing the forecast range and median for each indicator. This makes it easier for market participants to see how policymakers expect the U.S. economy to perform in the near, medium and long term.

The U.S. Federal Reserve publishes the Dot Plot every other meeting or at four of its eight scheduled annual meetings. The Summary of Economic Forecasts report is published together with the monetary policy decision.

“Dot Plot” provides a comprehensive look at the expectations of Federal Reserve (Fed) policymakers. Because the forecasts reflect each official’s interest rate forecast at the end of each year, it is considered a key forward-looking indicator. By looking at a “scatter plot” and comparing the data to current interest rate levels, market participants can see where policymakers expect rates to go and the overall direction of monetary policy. Because projections are released quarterly, a “scatter plot” is commonly used as a guide to calculate the final interest rate and possible policy payback point.

The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change from previous projections is likely to have an impact on the US dollar (USD) valuation. Generally speaking, if the “scatter plot” shows that policymakers expect higher interest rates in the near future, this is a rather hopeful trend for the US dollar. Similarly, if projections indicate a future of lower interest rates, the dollar will likely weaken.