The Fed kept the policy rate at 3.50-3.75%, with Governor Stephen Miran dissenting in favour of a 25-bp cut.
The dot plot points to only one 25-bp cut in 2026. No member expects a rate hike, while fewer members pencilled in multiple cuts.
As inflation risks may take precedence over growth concerns, we now expect only one 25-bp Fed rate cut in 2026 (previously two cuts).
Reduced rate-cut expectations and safe-haven demand should keep the USD supported. We expect USD/MYR to trade within 3.90-4.00 in the near term.
We maintain our view that the OPR will remain at 2.75% through 2026, supported by a stable domestic inflation outlook.
Fed kept policy rate steady
As expected, the Federal Reserve (Fed) voted 11-1 to maintain the federal funds target range at 3.50–3.75%, with Governor Stephen Miran dissenting in favour of a 25-bp cut. Governor Christopher Waller, who voted for a cut in January, supported no change this time. The shift in voting pattern underscores the fluid outlook amid the US-Iran conflict, with the FOMC statement noting that “the implications for the US economy are uncertain”.
Uncertain outlook warrants a Fed pause
The dot plot signals just one additional 25-bp rate cut in 2026, followed by another 25-bp cut in 2027, bringing the policy rate to 3.00–3.25% by end-2027. While this is broadly unchanged from the December projection, the distribution has become more concentrated, with no member expecting rates to go up to 3.75–4.00% (previously three), and fewer members pencilling in multiple cuts (Fig. 2).
Meanwhile, the Fed revised its baseline GDP growth outlook slightly higher relative to December (Fig. 3). On the potential upside from higher oil prices, Chair Powell noted that a sustained increase in oil prices would likely be needed before oil producers ramp up output, although “some of that could happen over time”.
The Fed also revised its 2026 PCE inflation projection higher, reflecting the oil shock and tariff-related goods price pressures. Importantly, Powell guided that the easing path assumes tariff-driven goods inflation will prove one-off and temporary. Should goods inflation fail to moderate as expected, the case for rate cuts would weaken.
Sticky inflation; cooling labour market
US inflation has remained sticky, rising +2.4% YoY in February (Jan: +2.4%). For context, inflation stayed within the 2.3-3.0% range throughout 2025, still above the Fed’s 2.0% target, partly reflecting the pass-through from President Trump’s tariff measures. February data showed persistent price pressures on necessity, with electricity, medical care and motor vehicle maintenance all recording inflation above 4.0%, suggesting firm underlying price momentum.
Labour market signals were mixed. Nonfarm payrolls unexpectedly declined by 92k in February (consensus: +59k; Jan: +126k), although part of the weakness may reflect temporary drivers, including the strike involving 31k healthcare workers at Kaiser Permanente and payback after strong January gains. The unemployment rate edged up to 4.4% (Jan: 4.3%), pointing to cooling labour market. On a positive note, initial jobless claims fell to 213k in early March, raising hopes that February’s weakness could prove to be short-lived.
Oil shock complicates Fed’s dual mandate
The escalation in the US-Iran conflict has led to renewed inflation risks. The closure of the Strait of Hormuz has disrupted global supply chains, particularly for crude oil and industrial inputs. US gasoline prices have risen sharply, with the national average climbing to USD3.84 per gallon, increasing by around 30% from pre-conflict levels. Higher pump prices could dampen household purchasing power and have spillover effects on the broader economy.
According to a Financial Times survey of economists, if crude oil prices remain near USD100/bbl, PCE inflation could rise by around 0.25-0.5 ppts (Fig. 4). Based on the Fed’s pre-conflict projection of 2.6% in January, this would push inflation closer to 3%, delaying the return to target. However, the growth impact is less clear. While most respondents (68%) expect higher oil prices to trim GDP growth by around 0.25-0.50 ppts (Fig. 5), some see offsetting support likely from stronger domestic energy production and defence-related spending.
The geopolitical tensions and energy shock could widen divisions within the FOMC, with doves focusing on softer labour data while hawks remain concerned about persistent inflation. On balance, we think the inflation will take precedence, as energy-driven price pressures could quickly feed into consumer expectations even if growth impacts remain unclear.
Trim to one rate cut in 2026; near-term USD supported
Taken together, the data supports the case for a prolonged pause, in which the Fed will likely adopt a wait-and-see approach in the near term. We now expect only one 25-bp rate cut in 2026, likely in September (previously two cuts). This is broadly in line with Fed funds futures, which currently price in one cut by December 2026.
Reduced expectations of rate cuts, together with safe-haven demand amid geopolitical tensions, should keep the US dollar supported in the near term. The dollar index has risen 2.2% MTD to 99.8, partially reversing the earlier decline this year. For Malaysia, the impact should remain manageable. As a net energy exporter, higher oil prices provide some buffer against global volatility, while continued political stability supports sustained capital flows. We expect USD/MYR to trade within the 3.90–4.00 range in the near term.
BNM policy to remain steady
We see limited immediate impact on BNM’s policy outlook despite the evolving Fed monetary policy trajectory. Domestic fuel subsidy mechanisms should cushion the pass-through from higher global oil prices, keeping inflation contained in the near term. That said, upside risks to inflation have increased, raising the prospect of BNM rate hike following its 25-bp pre-emptive cut last year. For now, we maintain our view that the OPR will remain at 2.75% through 2026.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 3.904824 | 3.932412 |
| EUR | 4.518520 | 4.523835 |
| CNY | 0.569767 | 0.570393 |
| HKD | 0.498103 | 0.501644 |
| SGD | 3.058844 | 3.080621 |