The culmination of the March meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) was a decision to leave the target range for the Fed Funds rate unchanged at 3.5%-3.75%. This decision was consistent with market expectations formed over the course of the past month. Much of what transpired during the FOMC press conference — Chairman Jerome Powell’s penultimate press conference as Fed Chair—was a quite detailed discussion of the Summary of Economic Projections (SEP) and was somewhat less expected by financial markets.
In 2012, the SEP introduced the “dot plot” concept whereby individual Federal Reserve officials (the 19 members of the Fed Board of Governors and Federal Reserve Bank Presidents) are asked to anonymously document their forecasts for GDP, inflation, unemployment, and the Fed Funds rate. The intention was, and continues to be, to provide greater insight into the economic assumptions driving the near- and medium-term outlook for interest rates. The dot plots also serve to emphasize that the decisions taken by the FOMC are formed in a process of considerable creative tension, often playing out within remarkably narrow bounds. There were many questions at the press conference about both the median forecast and the dispersion around that forecast, but the message conveyed by the median forecast was sufficiently interesting as to keep everyone well-occupied for the allotted 45 minutes. Specifically, the SEP for March, in contrast with that of December, modestly raised the median forecast for GDP growth in both 2026 and 2027, notably raised the forecast for inflation in 2026, and kept the unemployment rate and the end-of-year fed funds rate unchanged (4.4% and 3.4%, respectively). When asked about the reasoning behind the improved outlook for GDP growth, Chairman Powell stated, with little hesitation, that he felt it to be reflective of the Federal Reserve’s increased comfort with a more optimistic view on the role of productivity. The fact that productivity growth has been unexpectedly high for a number of years now seems to provide the Fed with a growing confidence that businesses have become more efficient in their use of labor and capital, probably as a result of innovations forced upon businesses during the labor shortages of the pandemic years. With productivity improvements from AI looming on the near horizon, accepting the likelihood of faster growth despite a limited supply of labor seems to be a Fed idea whose time has come.
Nevertheless, as observed by several reporters in the press conference, the benefits of higher productivity growth, which would normally be assumed to work towards reducing inflation, did not seem to be accruing to the SEP’s forecast for inflation in 2026. An answer to this conundrum that referenced the energy price shock from the Iranian war would have probably been readily accepted, if possibly politically uncomfortable. However, Chairman Powell’s explanation became a discourse on goods inflation preceding the war and resulting from, in the Fed’s estimation, tariff effects that had not yet passed through the system. In other words, inflation was already higher and going in the wrong direction before the energy shock of the war and its impact on gasoline prices, transportation costs, and possibly a wide variety of consumer goods and services. Furthermore, there was no clear certainty as to when those tariff effects would be fully out of the picture. As a result, and with a healthy level of respect for what the war may yet do to prices for an indeterminate length of time, Chairman Powell moved away from expressing a greater concern for the employment part of the Fed’s dual mandate and stated clearly that both employment and inflation are monetary policy concerns of substantial and equal import. What the financial markets heard in all this, and it would be difficult to argue with the interpretation, was that the Fed was doing anything but “looking through” the current inflation trends and was very focused on the disparity between today’s inflation rates (2.8%-3.1%) and the Fed’s target of 2%.
It would be unwise to lose sight of the fact that this particular Summary of Economic Projections was presented with an unusual amount of emphasis on the uncertainty surrounding the forecasts. Chairman Powell went so far as to say that one SEP respondent joked that if there was ever a time to skip the quarterly SEP, that time would be now. Asked about the effects of the war, the Chairman said that the Fed was effectively in the same position as the rest of us, watching from the sidelines without much insight into how long the conflict would last or what its ultimate impact on energy and trade would be. In another sign of what must have been a quite unusual FOMC meeting, Chairman Powell responded to a question about the elephant in the room — why does the SEP continue to indicate that interest rates will decline this year when economic growth is projected to be better, unemployment steady, and inflation higher — with the verbal equivalent of a shrug of the shoulders. “Everyone has different reasons,” he said in a manner that suggested he really didn’t know, or could not explain, those reasons.
When the meeting minutes are released three weeks from now, there may be greater clarity on who said what and why. It is unlikely that this knowledge will really tell financial markets something that they do not already know. The Fed is, in fact, worried about inflation, much more worried than they were at the end of 2025. Officials will be laser-focused on inflation expectations over the coming weeks, attempting to assess whether the understandable increase in short-term inflation expectations due to the war is at risk of becoming embedded in longer-term views of entrenched inflation, something that would be quite problematic. Goods inflation is also a focus, in sharp contrast to the situation two years ago when Chairman Powell considered service sector inflation the major worry. And a great deal of the Federal Reserve’s outlook for full employment is hinged on a variable that is not directly measured, is only observed in the aggregate after-the-fact, and, by Chairman Powell’s own admission, “is often revised away”: productivity growth.