Zero Degree Interpretation of the Federal Reserve Interest Rate Decision Press Conference on March 19

Old Bao’s inaction is waiting for the right moment; his attitude has shifted toward hawkish.

After the January FOMC meeting, two labor reports showed that over the past three months (including December 2025), U.S. non-farm employment increased by only about 10,000 jobs, still weak. February CPI data at 2.4% met expectations, January PCE at 2.8% was slightly below forecast, and inflation hasn’t shown a clear decline. However, the previous policies favoring supporting employment kept the market hopeful for three rate cuts this year. That illusion was shattered when the Middle East conflict erupted. Oil prices soared from around $70 to over $100, immediately raising concerns about rising inflation, declining employment, and shrinking consumption—images reminiscent of the stagflation nightmare of the 1970s. Before the March FOMC meeting, market expectations for rate cuts were zero; the two-year Treasury yield, considered a real guide to policy rates by bond king Lael Brainard, hovered around 3.75%.

This month, the FOMC announced it would keep rates steady at 3.5%–3.75%, with one dissenting vote—likely from President Trump’s “puppet” Mester. Market had expected Fed Governor Waller to continue advocating for rate cuts to support employment, but he seems to have shifted to align with the committee consensus amid Middle East tensions.

The Summary of Economic Projections (SEP) and dot plot show:

• Economic growth at 2.4% (December forecast was 2.3%, September 1.8%). What drove this forecast?

• Unemployment at 4.4% (both December and September forecasts were 4.4%)—steady as ever.

• Inflation at 2.7% (December forecast was 2.4%, December 2023 forecast was 2.1%)—what was achievable two years ago now seems unlikely.

• Policy rate at 3.4% (both December and September forecasts were 3.4%)—just one rate cut expected, really?

Questions from reporters mainly focused on monetary policy amid high oil prices and the U.S. economy: “Inflation has exceeded the target for five years. Are you still planning to do nothing as oil prices surge?” “Is maintaining current policy to prevent inflation or to support the economy?” “Are there internal discussions about rate hikes?” “During the Gulf War, policies aimed to protect the economy—will you do the same now?” “Can increased oil drilling offset weak consumption?” “With such poor employment data, do you see greater employment risks?” “Are tariffs’ impact on inflation short-term?” “Can AI help lower inflation?” The questions reflect widespread concern among financial media about the rapidly expanding shadow of uncertainty.

Below are the Fed Chair Powell’s responses (excluding reporter questions), verbatim:

Monetary Policy Outlook

Inflation has remained somewhat high over the past few years, with setbacks like tariffs impacting goods inflation. We are closely monitoring how tariffs’ one-time effects on goods inflation evolve. We aim to see progress in the 50–75 basis point inflation contribution from tariffs within the 3% core inflation. Whether to keep policy unchanged depends on energy price shocks; the standard approach is to not react, provided inflation expectations remain anchored. Given that inflation has been above target for five years, maintaining an unchanged stance is not a simple decision.

Why do rate cuts still appear in forecasts? The committee has 19 members, each with their reasons. The median dot plot shows no change in the policy stance, but the trend toward fewer rate cuts is clear—4 to 5 members have reduced their forecast from two cuts to one. The forecast for one cut remains because we still expect tariffs’ effects to fade by mid-year, with inflation continuing to improve. But rate forecasts depend on how the situation develops; if inflation doesn’t improve as expected, there will be no rate cuts.

This year’s inflation forecast is somewhat high due to oil prices, but it doesn’t affect core inflation. The main reason for the upward revision is that core price inflation is improving more slowly than expected, and how long tariffs will influence inflation remains uncertain.

No one knows how big external shocks will impact the economy; the forecasts are not backed by strong conviction. If oil prices rise significantly and stay high, consumption and household income will be affected, but the impact could be lower or shorter than anticipated. Many members have decided not to update their forecasts because of this uncertainty—they’ve written down their views but are unsure about future scenarios. Meanwhile, the economy remains resilient, goods inflation is still affected by tariffs, and the labor market has been relatively stable since September last year, with unemployment remaining very low. But we don’t know how these influences will evolve.

Some members have suggested that rate hikes could happen next time; most do not consider this the baseline, but the option has not been entirely abandoned. A few have proposed forward guidance in both directions.

Many commodities are affected by Strait restrictions, but we cannot control the situation—only observe and wait. How long this will last, its impact on prices, and how consumers will react—all are uncertain. We prefer not to speculate but to watch developments.

I often say we will learn much before the next meeting. Over the next six weeks, new information about economic growth, outlook, and Middle East developments will emerge. How they will influence policy, I don’t know. We’ve discussed some scenarios, but they are highly uncertain. We don’t know what will happen, and we won’t try to guess. We’re waiting to see how things unfold.

The U.S. economy has withstood many shocks and remains strong. In 2023, we raised rates sharply, yet almost all economists predicted a recession—and none occurred. That’s surprising. I don’t know what will happen next or how the Middle East situation will develop; I prefer not to speculate.

Forecasts do not constrain policy; members are willing to revise their views as circumstances change. These are just current thoughts; future developments may alter them. Forecasts are not binding; errors are normal. Given the high uncertainty, we should remain cautious about economic projections.

On the Dovish-Hawkish Balance: The surge in oil prices due to Middle East tensions clearly increases inflation pressures. The Fed maintains rates but still forecasts one rate cut this year, which initially seems dovish. However, Powell’s words reveal hawkish undertones. For example, he notes that the standard response to energy shocks is to “look through” them, but only if inflation expectations remain anchored—implying that with inflation persistently above 2% for years, this is not the usual scenario. Powell also limits the outlook: “If we don’t see expected inflation improvement, there will be no rate cuts.” He hints that some members have considered rate hikes at the next meeting—“We haven’t entirely ruled out that option.” Then, Powell honestly admits, “I don’t know what will happen; I don’t want to guess.” Most strikingly, he warns everyone not to trust forecasts—they are just plans that can be changed at any time. It’s as if he’s saying: keep policy steady, but if circumstances change, we might cut or even hike rates. Old Bao’s inaction is waiting for the right moment; his stance has shifted toward hawkish. Counting how many times he said “I don’t know” shows the FOMC is basically in a state of oscillation. Not their fault.

Macroeconomic Environment and Labor Market

Traditionally, monetary policy responds to energy shocks by “looking through” them, as long as inflation expectations stay stable. Rising oil prices negatively impact consumption and employment but benefit production—oil companies’ profits increase, and drilling expands. But oil firms don’t just decide to drill more once prices hit $70; they carefully assess whether long-term prices can stay high. Currently, production hasn’t expanded, but it might in the future. Energy shocks can suppress consumption, hurt employment, and push up inflation.

We understand the Fed’s history of fighting inflation but avoid overhyping it. Instead, we base decisions on current facts. We’ve experienced pandemic shocks, tariffs, and now oil prices—how big and how long-lasting their effects are remains uncertain. Repeated shocks could influence inflation expectations, which is concerning. We must ensure expectations remain anchored at 2%, and we will do everything to keep inflation stable.

Supply shocks have occurred multiple times, and we’ve thought about them extensively. They are fundamentally different from demand shocks because they create conflicting goals for the Fed—fighting inflation while supporting growth. COVID was a one-off, tariffs are one-off, and the Russia-Ukraine conflict’s oil supply impact is also temporary. Many articles debate whether these shocks signal a fundamental change in the world; opinions vary. Over the past five years, supply shocks have occurred more frequently than before—fact.

Short-term, inflation expectations have risen significantly, for obvious reasons. Surveys show long-term inflation expectations remain very stable around 2% for a long time. We must pay close attention to shocks from geopolitical conflicts and see how they influence prices.

Members have raised their growth outlook by 0.1%, trusting productivity gains. Although recent inflation and employment risks put policy in a dilemma, it’s far from stagflation. In the 1970s, unemployment was double digits, and inflation was extremely high—that was stagflation. Today, unemployment is near its long-term normal, and inflation is only about 1 percentage point above target. Stagflation is a much worse scenario.

Uncertainty about how turmoil will impact the economy remains. A $1 increase in gasoline prices affects consumers—hoping impacts won’t last long, but I don’t want to pretend to know what will happen; no one does. We must watch how the situation develops.

Whether policy should focus on supporting growth depends on whether tariffs’ effects fade and inflation declines, and on how much and how long shocks influence prices—most importantly, on inflation expectations.

January employment data was slightly optimistic; February’s was off, but overall, the labor market remains stable. The number of jobs created is very low. Over the past six months, including the Fed’s estimated statistical bias, new jobs are effectively zero. This equilibrium implies a risk of decline, which is unsettling. The U.S. labor demand might be responding to an extremely low, near-zero labor supply—an unprecedented zero-employment-growth scenario. The simple math: the U.S. unemployment rate is at its natural level. We’re very concerned, but it might also be a result of immigration policies.

Over the past four or five years, labor productivity has increased significantly—not due to AI, but possibly because companies, during the pandemic, optimized labor due to shortages. Economists are often skeptical of productivity gains because they are rare; many statistical improvements are later revised away. I didn’t expect to see such sustained productivity growth, but it’s a good thing if it leads to income increases.

In the short term, building data centers pressures prices of goods and services, marginally boosting inflation and pushing up neutral interest rates. But as these investments expand output and improve efficiency, they could help lower inflation. The actual impact depends on demand and supply growth rates—we can only wait and see.

Dovish-Hawkish Summary: The economy’s steady growth led the Fed to raise its growth forecast for this year, but labor demand remains very weak. Fortunately, immigration policies have significantly limited labor supply, keeping unemployment near normal. Powell calls this a “zero employment growth equilibrium,” attributing it to years of productivity improvements—simply put, the U.S. economy has learned to produce more with fewer people. The Fed has not yet credited AI’s role; they prefer to believe that the economy has adjusted to labor shortages caused by pandemic and immigration policies, forcing firms to optimize labor structures. Powell’s concern about this “zero employment growth” is somewhat performative—if the Fed truly accepted productivity gains, then weak labor demand would be a structural change, and monetary policy’s tools would be limited. Lowering rates to boost AI and automation might further reduce jobs. Powell refuses to focus policy on economic growth, rejects stagflation risks, and dismisses AI investments as immediate inflation reducers. His macro risks are oil shocks and tariff-driven inflation; he subtly notes global supply instability as a major uncertainty. Even the best news—productivity gains—contains hidden worries. The world today is different.

Inflation Risks

Current policy is at the upper end of neutral or slightly restrictive. We expect the main decline in inflation to come from the fading of tariffs’ one-time effects, which may take 9–12 months, starting last summer. We hope that after tariffs’ effects diminish, goods inflation will revert to its long-term trend, which has been negative for many years—close to zero before tariffs, now at 2%. This is clearly due to tariffs’ one-off impact, not the Phillips curve. Maintaining a slightly restrictive policy is necessary but not excessive, as the labor market still faces downside risks. Our policy framework requires balancing inflation and employment—tightening to meet inflation, easing to support employment. Currently, the policy stance is appropriate.

Non-housing services inflation has not declined as expected, which is disappointing. Since the labor market isn’t generating inflationary pressure, non-housing services inflation should have fallen. We expected housing inflation to decrease first, then goods inflation, followed by non-housing services. Why hasn’t non-housing services inflation fallen? That’s a good question.

It’s hard to say whether employment or inflation poses a greater risk. Overall, employment remains stable, but both supply and demand sides have declined significantly—more accurately, in proportion. The unemployment rate has been stable since September last year. Core inflation at 3%, nominal at 2.8%, exceeding the 2% target for a long time—this is concerning. Our focus is on bringing inflation back to 2%, but recent oil price impacts complicate the picture. It’s hard to judge which risk is greater.

Tariffs’ impact on prices is uncertain but should be one-off. Inflation refers to sustained, year-over-year price increases; unless tariffs increase annually, their effect should be temporary. Similarly, energy prices are treated as one-off impacts because they tend to fall back. How tariffs influence various prices over time is uncertain—after COVID, inflation did decline, but it took two years longer than expected. We must remain humble about how long tariffs’ effects last. Fed experts estimate the path and timing for tariffs’ impact to fade within this year. Court rulings have reduced tariffs, but the government says they may restore tariffs through other channels—something to consider.

In recent years, global inflation has been driven by pandemic-related factors. Over the past three years, U.S. wages have increased in real terms, but it will take several more years to improve consumers’ actual experience. People feel squeezed as inflation penetrates everyday expenses like insurance. We are very attentive to inflation and people’s feelings, which strengthens our resolve to keep inflation at 2%.

We are prepared to take all necessary actions to stabilize prices. Our focus isn’t just on diesel but on broader oil and derivatives, which affect production and transportation costs, impacting nominal and core inflation. We watch oil prices closely but cannot predict how much they will rise or how long they will stay high—only observe and wait.

Dovish Summary: According to economist Friedman, inflation is always a monetary phenomenon. The Fed’s acknowledgment of inflation is often cautious, understandable. Many price increases are categorized: pandemic-related inflation is temporary; tariff effects are one-off; non-housing services inflation is “a good question.” The undeniable fact is that U.S. inflation has exceeded 2% for five years, and the compound effect has caused public dissatisfaction, turning into political issues. Gas prices recently rose 30%, reaching $3.91 per gallon; further increases could soon squeeze consumer spending—the engine of 70% of U.S. growth. When asked about the relative importance of employment and inflation, Powell emphasizes inflation risks. Since late last year, the Fed has shifted focus from weak employment to inflation. This hawkish tilt pressures markets. But at its core, the central bank’s fundamental task remains maintaining currency stability at all times and places. Employment issues should be handled by markets or government, not necessarily by the Fed, which does not have a dual mandate like the ECB or Bank of England.

About the Fed

If my term as Chair ends before a new Chair is confirmed, I will serve as acting Chair, as required by law and customary practice. Since we’re here, I’ll add: I will not resign from the Board of Governors until the investigation is complete. I have not decided whether to stay on after the new Chair is confirmed.

Regarding potential changes to communication mechanisms, the answer is no. We’ve reviewed the SEP forecasts and proposed some ideas, but members have not shown strong support, so no plans to change.

Maintaining independence is crucial for us to fulfill our dual mandate. Almost all developed economies with market and democratic systems accept central bank independence, which helps keep prices stable. The Fed’s overseeing body is Congress, which has bipartisan support for independence.

Dovish Summary: Besides tariffs and oil shocks, the Fed has unfortunately become a source of uncertainty in the U.S. economic system. This is partly due to Trump’s unpredictable actions—calling Powell “Mr. Slowpoke” on social media, suing Fed officials Cook and Powell, and preemptively announcing Waller as the new Chair. He’s trying to pressure Powell into easing policy. Markets are highly sensitive to government interference, especially when inflation remains above target. Long-term Treasury yields rise, the dollar weakens, gold prices surge—all reflecting risks to the dollar system and concerns over Fed independence. Powell’s announcement of staying on temporarily seems aimed at signaling policy continuity and independence. How will Trump respond? Will he call Powell “Mr. Reluctant to Leave”?

Dovish Summary (Blackboard): Without the Middle East conflict, this meeting would likely have kept policy steady, as inflation improvement remains elusive. February PPI core at 3.9% far exceeded expectations, influencing PCE inflation. The current risks are not just energy shocks but disruptions across a range of commodities—from oil to fertilizers, metals, and specialty gases for chips. As Mao Zedong once said, “Once you’ve engaged the enemy, the plan is useless.” This applies to Fed policy forecasts now. The meeting sent two key signals: first, the Fed raised its long-term GDP growth estimate from 1.8% to 2%; second, the long-term neutral rate target increased from 2.5% to 3.1%. It appears the Fed is beginning to accept the conclusion of rising productivity—something last recognized by Greenspan 30 years ago. Productivity gains are rare but crucial—they mark a leap in economic efficiency, underpin social wealth growth, help reduce inflation, but also cause structural employment pressures. Could this justify rate cuts? Not so fast. Global changes cause frequent supply shocks, inflation remains stubborn, and massive investments push neutral rates higher. Rate cuts are still just a mirage in the fog.

What is “Zero-Rate Interpretation”? The author refrains from editing or framing content, merely observes and records the candid Q&A at the press conference—like a sashimi platter (with a bit of wasabi and soy). Readers’ taste buds (especially after a few bites) will discern the true flavor. No economic theory analysis—only curiosity-driven ears catching euphemisms, metaphors, and subtle hints. The author is a market participant (like countless others), not a purely rational actor, not a macro wizard, just wanting to understand what the Fed is thinking and what the market thinks the Fed is thinking—whether to align with or oppose market expectations (who’s the judge in this beauty contest?).

(Author works in manufacturing management and is a seasoned market observer)