Neutral Rate Projection Moves Higher
The longer-run neutral rate projection moved up to 3.1% from 3.0%. Forecast dispersion across the Committee remains wide. On the more hawkish end, 7 participants expect no rate cuts in 2026. It would take 3 participants moving from one cut to no cuts to shift the median to zero cuts. Compared with December, the 2026 forecast range narrowed to 2.6–3.6% from 2.1–3.9%. The central tendency rose to 3.1–3.6% from 2.9–3.6%. The Federal Open Market Committee’s latest projections show they view the current inflation as a temporary problem. They’ve raised their 2026 inflation forecast to 2.7%, which aligns with the February CPI report that came in hot at 3.4% year-over-year. Yet, they are still signaling one rate cut for this year, creating a tension that traders need to watch closely.Market Pricing Reflects Committee Split
The wide split among committee members, with seven expecting no cuts at all in 2026, shows how fragile the single-cut median is. We can see this uncertainty reflected in the derivatives market, where Fed Funds futures are now pricing only a 45% chance of a cut by the December meeting. This suggests options that bet on volatility or a hawkish surprise could be underpriced. When we look back at 2025, the market was far more certain about a series of cuts, a view that has been consistently challenged by strong data. The recent Non-Farm Payrolls report, which added a robust 215,000 jobs, gives the hawks on the committee more reason to delay any easing. This continued economic strength makes it difficult for the Fed to justify cutting rates even if they believe inflation will fall later. The Fed nudging up its long-run neutral rate projection to 3.1% provides underlying support for the US Dollar. This helps explain why the Dollar Index (DXY) has remained firm, recently trading above the 105.50 level. Traders should consider that any delay in rate cuts will likely keep the dollar stronger for longer against other major currencies. Create your live VT Markets account and start trading now.
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