For the second consecutive policy gathering, the Federal Open Market Committee (FOMC) decided to remain ‘on hold,’ keeping the fed funds trading range at 3.50%–3.75%. For the most part, this result was largely expected by markets. Unfortunately for the Fed, policymakers are in the challenging position of juggling incoming economic and inflation data as well as uncertainties emanating from the Middle East war.

Against this backdrop, both the Fed and the broader investment community are left wondering what could come next from a monetary policy standpoint. One point to address upfront is that despite the surge in energy prices, the Fed will not be entertaining any potential rate increases. Rather, the voting members remain in a data-dependent mode that should continue to argue for a more patient approach to the decision-making process. This point is underscored by the fact that the FOMC cut the fed funds rate by 75 basis points from September through December of last year. In other words, it is not as if the Fed is ‘behind the curve’ at this point.

With geopolitical events creating an uncertain setting, it is important to look at how the economy and inflation were behaving prior to the Middle East war. According to Q4 2025 real GDP data, the broader economy slowed to end last year, with growth at 0.7%. However, the federal government shutdown likely weighed on activity and should not be a restraining force in 2026. In fact, a ‘true’ measure of underlying demand, real final sales to private domestic purchasers, rose by just under 2% in Q4, underscoring how personal consumption and investment remain positive forces for overall growth.

As far as the Fed’s dual mandate goes, new job creation took a surprising turn to the downside in February, but broadly speaking, the employment landscape still appears to be in a ‘no-hire, no-fire’ zone. Importantly, jobless claims remain historically low and remain at levels not historically associated with economic downturns. From the inflation side of the equation, price pressures were still higher than what the Fed would like. Indeed, core Consumer Price Index (CPI) has moderated since last summer, but the Fed’s preferred core Personal Consumption Expenditures (PCE) deflator gauge has risen to 3.1% on a year-over-year basis, or more than a full percentage point above the Fed’s 2% target.

The Fed will probably ‘look through’ the recent surge in energy prices. Yes, this development has created a noteworthy shift in inflation fears, but if there are no further adverse Middle East developments and hostilities are not prolonged, oil and gasoline price increases could reverse quickly. In fact, September 2026 futures prices for WTI crude oil have not experienced the same run-up in price that the nearby contract has.

Based upon the macro and inflation outlook, there does not appear to be a need for policy to enter an ‘accommodative phase,’ but perhaps just get back to “neutral.” This is a point Powell & Co. have also made. If you believe “neutral” begins somewhere around 3.50%, then we are essentially already there, or very close.

The Bottom Line

I would agree with the notion that monetary policy is likely tilted toward further easing, but I would also recognize that financial markets will be operating in a scenario where rate cuts are either near the end of, or already at the end of, this easing cycle.