Fed set to hold as Deutsche Bank flags geopolitics clouding outlook

Neutral-to-hawkish hold: focus on oil and geopolitics may keep rate-cut expectations contained, supporting USD and front-end yields if inflation risks are seen as skewed higher.Summary:Deutsche Bank expects the Federal Reserve to leave rates unchangedStatement tweaks likely modest, with labour data language smoothedJanuary–February payroll volatility to be downplayedGeopolitical risks expected to feature more prominentlyOil prices seen as key channel impacting financial conditionsInflation risks tilted slightly higher in the near termJerome Powell unlikely to signal policy shiftNear-term outlook expected to remain broadly unchangedThe Federal Reserve is widely expected to leave interest rates unchanged at its March policy meeting, with economists at Deutsche Bank anticipating a steady hand amid heightened geopolitical uncertainty.According to the bank’s preview, policymakers are likely to make only minor adjustments to the post-meeting statement, reflecting a desire to avoid overreacting to mixed incoming data. In particular, recent labour market signals are expected to be smoothed in the communication, following conflicting nonfarm payrolls readings across January and February that have complicated the near-term employment outlook.Instead, greater emphasis is expected to be placed on rising geopolitical tensions, which Deutsche Bank believes will be acknowledged as a source of increased uncertainty and a potential driver of short-term upside risks to inflation. The bank highlights that developments in energy markets, particularly oil prices, are likely to be central to the Fed’s evolving assessment of inflation dynamics.During the press conference, Chair Jerome Powell is expected to frame recent global developments as primarily feeding through to the economy via financial conditions. Higher energy costs, in particular, could tighten conditions indirectly, even without additional rate hikes.However, Deutsche Bank does not expect Powell to signal any meaningful shift in the policy trajectory. While acknowledging the evolving risk backdrop, the Fed is likely to maintain its current stance, balancing persistent inflation concerns against signs of uneven economic momentum.Overall, the message is expected to reinforce a “wait-and-see” approach, with policymakers remaining data-dependent while closely monitoring geopolitical developments and their potential spillover into inflation and broader financial conditions.
This article was written by Eamonn Sheridan at investinglive.com.

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