{"id":8084,"date":"2026-03-13T19:47:55","date_gmt":"2026-03-13T19:47:55","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/?p=8084"},"modified":"2026-03-18T18:13:16","modified_gmt":"2026-03-18T18:13:16","slug":"fed-to-hold-the-line-as-risks-mount","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/us-week-ahead\/fed-to-hold-the-line-as-risks-mount\/","title":{"rendered":"Fed to hold the line as risks mount"},"content":{"rendered":"\n
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The main event for the week of March 16th is the Fed\u2019s second meeting of 2026 but it is expected to be largely uneventful.\u00a0We anticipate the Fed will hold rates steady at 3.50-3.75%<\/strong>\u00a0as they remain on the sidelines keeping an eye on geopolitical developments as well as signs for continued weakness in the labor market.\u00a0<\/p>\n<\/div><\/div>\n<\/div>\n<\/div>\n\n\n\n

With an escalating geopolitical crisis in the Middle East, the Strait of Hormuz has been closed. The closure risks fueling energy price spikes that will add to inflation. We have run our own range of estimates<\/a>, which suggest that if oil lands in the $75 to $100\/barrel range for a meaningful duration, inflation would likely settle above 3% y\/y.\u00a0<\/p>\n\n\n\n

Zooming in on core inflation, the details of the February inflation report<\/a> were problematic, despite the numbers looking benign on the surface. The core goods sector has been helped by used car prices, and stripping this out, we are seeing a meaningful acceleration driven by trade-exposed sectors, specifically, auto parts, apparel, recreation goods, and personal care products. Pair this with the fact that we see a limited path for disinflation in core services for the remainder of the year, and core inflation has a sticky trajectory. Of growing concern is the pace of core PCE, which accelerated to 3.1% in January, This is the Fed’s preferred measure of inflation and has been diverging from core CPI for several months. <\/p>\n\n\n\n

Indeed, monetary policy is not the appropriate tool to combat a tariff shock any more than it is to address an energy shock. What the Fed will be concerned with, however, is inflation expectations rising. And as RBC Rates Strategists, Blake Gwinn and Izaac Brook, have written, \u201c[..]Recent Fed speakers have already emphasized their willingness to look through higher energy prices. But \u201clooking through\u201d doesn\u2019t necessarily mean they will be comfortable cutting into energy-related pressures, and they can\u2019t afford to take anchored expectations for granted.\u201d For now, we expect that the Fed will be increasingly data dependent. The impact of an oil shock exacerbates our \u201cstagflation lite\u201d scenario, putting upward pressure on prices and dampening growth.<\/p>\n\n\n\n

Turning to the other side of the Fed\u2019s mandate, it will take time for the oil shock to be demand destructive. US consumers will likely draw down savings or rely on the use of credit before paring back discretionary spending. Still, the longer the oil shock draws out, the more realistic it is to expect a deterioration in real consumer purchasing power. The question remains \u2013 is the US labor market positioned to handle the deterioration? And while the February jobs report looked worse from the headlines than it was (-92K jobs were shed, in part due to a nurses\u2019 strike), it did expose a key theme that the US labor market is currently grappling with, which is there is minimal job creation. Thankfully, record retirements will continue to create vacancies for those searching for work, and this should help keep the unemployment rate relatively steady. But as trade-exposed sectors continue to shed jobs<\/a>\u00a0(and refrain from backfilling), an energy price shock compounds pre-existing worries.<\/a><\/p>\n\n\n\n

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Aside from the Fed meeting, here is what else we\u2019re watching next week:<\/p>\n\n\n\n