March 18, 2026 FOMC Meeting Analysis

Hi everyone, I’m Caroline Casavant.

I’m the Senior Financial Strategist here at the Federal Homeland Bank of Boston. Thank you for tuning in to our post-FOMC update.

In this video, I want to quickly walk you through the events of today’s FOMC, give you an update on market pricing after the FOMC, and do a deeper dive into recent moves in inflation expectations and what it might mean for your balance sheet.

So, at the March FOMC, the target range was maintained at 3.5% to 3.75%, as was widely expected.

The FOMC statement was also largely changed.

The unemployment rate was characterized as little changed rather than showing signs of stabilization, and the FOMC added a new sentence noting that the implications of developments in the Middle East are uncertain for the U.S. economy.

This statement also showed that we had one descent from today’s policy outcome from Governor Myron, who preferred a 25 basis point cut.

Remember that there were two descents last time.

One other thing we got out of today’s meeting is a summary of economic projections.

For those who are unfamiliar, the Summary of Economic Projections, also known as the DOT Plot, is a set of projections from FOMC participants that give there forecasts for a variety of indicators, including major indicators of U.S. growth and also interest rates.

Today’s SEP showed generally higher growth and inflation projections, but little change to the unemployment projections.

The real median GDP forecast moved up across all time horizons to 2.4 for this year, 2.3 for next year, 2.1 for 2029, and 2.0 for the longer run.

The median PCE and core PCE projections moved up for this year and next year to 2.7 and 2.2% respectively.

Generally when we think about the SEP what we care about most are the projections for the Fed funds rate given that the committee has direct control over it.

What’s interesting about this SEP is that it really didn’t change from the prior one.

The only change was to the longer run median projection, which moved up 10 basis points to 3.1%.

That means that the median participant still has a target range of 3.4% at year end this year.

That’s one cut.

The median projection also has one cut for the following year and then no change for the rest of the time horizon.

If you look under the hood though there was some movement in today’s SEP, specifically the lower end of both the range and the central tendency for the target range at year 2026 moved up.

As of this recording, the front end of the treasury curve moved up modestly after today’s FOMC events.

The market is pricing less than one cut this year and the first full cut in the first half of 2027.

During Chair Powell’s press conference, he stressed that the committee was focused on not overreacting to recent developments in Iran and their impact on financial markets.

Instead, he’s pretty focused on continuing to see pass-through in the form of lower goods inflation as the effects of tariffs fall off.

With that in mind, let’s take a step back and think about what’s happened in markets in recent weeks and what it might mean for your balance sheet.

It’s really important to note the inflation backdrop in which all of this is occurring.

So inflation has been above the Fed’s target for about five years now.

The most recent CPI and core PCE data printed at 2.4 and 3.1 percent respectively, and they preceded the events in the Middle East.

In 2025, the FOMC expressed relatively limited concern about the above-target prints, mostly citing that they were due to tariffs, which are expected to be a one-time price impact.

There was solid statistical evidence for this narrative in 2025, as the sectors that were most impacted by tariffs did see outsized inflation pressure.

In recent prints, that doesn’t seem to be quite as true.

The inflation pressure from goods has come down, while the inflation pressure from services has really not.

And another important thing to think about as we forward is that for most of recent economic history, PCE has printed lower than CPI, but in recent months you’ve actually seen PCE print above CPI.

CPI has a higher component from energy, so we’re more likely to see CPI move up towards PCE than we are to see compression the other way.

Okay, so since the invasion of Iran, we’ve seen lots of volatility in oil and therefore lots of utility in TIPS-implied breakevens.

So TIPS-implied breakevens measure the difference between Treasury inflation protected securities and nominal Treasury securities.

They’re not a perfect read on market-based inflation expectations because they do incorporate relative liquidity profiles of TIPS and nominal securities, but they give us a timely update on one way that the market is thinking about inflation.

In March, the five- and ten-year breakevens have increased about 20 and 15 basis points respectively.

We’ve also across the curve and particularly at the front end where the two-year treasury is up about 30 basis points.

When we think about what this means for your balance sheet, it’s important to differentiate between supply-side inflation and demand-side inflation.

When you see demand-side inflation, it’s typically accompanied by consumer strength.

So although depositories still have to pay higher funding costs in the form of higher interest rates, it’s often accompanied by an increase in demand for loan issuance and sometimes a steeper curve.

When you see a supply-side inflation shock, as occurs in the case of an oil spike, it’s usually not accompanied by an increase in consumer strength and demand for credit.

We’ve actually seen credit spreads move only very modestly in recent weeks, which suggests that markets aren’t really pricing a material adverse economic event from this, but you’re also not seeing buying opportunities or real widening in credit spreads.

So what can you do as a manager of a balance sheet?

The first thing is take a look at the probability distribution that you have for rates.

So, before the invasion of Iran, we had rate cuts priced into the curve for this year.

Those have been priced out.

And while it’s nobody’s base case, you’re increasingly seeing FOMC participants want to talk about reintroducing the risk of hikes into the distribution.

So take a look at your own probability distribution for rates and make sure it still makes sense given the recent moves that we’ve seen.

And particularly, if you expected to pass on lower interest rates through lower interest deposits, maybe reconsider if that’s actually going to come to pass.

Take a look at FHLB advances relative to the rate that you pay on CDs.

You may find that FHL Bank advances offer the most financially attractive and customizable source of funds.

It’s also appropriate to review your institution’s duration risk and make sure it’s in line with your intentions.

Should you consider extending duration?

Should you consider taking out a fixed rate advance to manage your risk, and maybe also consider option embedded advances to manage tail risks, which may become more likely given interest rate volatility is picked up.

With that in mind, another thing you should think about is not just the level of interest rates, but also the level of interest rate volatility as you’re managing your balance sheet in a prudent way.

So to be clear, interest rate volatility is still much lower than the elevated levels that we saw in 2022, but it has increased.

You might think about how your institution is positioned to relative to changes in interest rate volatility.

For example, if you have lots of trading activity or material exposure to floating rate instruments, you’re likely to perform well in an elevated interest rate volatility environment.

However, if you have lots of fixed rate exposure, for example, exposure to fixed rate mortgages, you may be vulnerable to underperforming if interest rate volatility picks up.

One thing you could consider to tailor your convexity exposure is the Federal Home Loan Bank’s MPF program, which allows you to sell mortgages but retain some risk in the mortgage for which you’re compensated over time.

You also might think about managing your balance sheet so that you’re well positioned to take advantage of buying opportunities should better entry points exist in the markets.

Thanks for tuning in.