Fed on pause, world on edge

The U.S. Federal Reserve held interest rates steady today, extending its pause on rate cuts into a second consecutive meeting. Against a backdrop of geopolitical turbulence, oil price spikes and mixed economic data, we share our updated outlook and investment implications.

Key takeaways

• The Fed kept interest rates unchanged once again, with the target policy rate range remaining at 3.50%-3.75%.
• The policy statement remained largely unchanged, and Governor Miran dissented again in favor of a cut.
• The Summary of Economic Projections showed upward revisions to the growth and inflation forecasts. The median policy rates forecast was unchanged, though several members moved toward fewer cuts.
• In his press conference, Chair Powell leaned slightly hawkish and downplayed the signal from the SEP, emphasizing elevated uncertainty.

What happened?

The U.S. Federal Reserve held interest rates steady today, extending the pause in rate cuts that began in January. The target range for the fed funds rate remains at 3.50%–3.75%, in line with market expectations.

The policy statement changed little. The Fed added a reference to “uncertain” implications of the Middle East conflict but otherwise kept its language intact. The Summary of Economic Projections (SEP) held the rates outlook steady, with one cut expected this year and one next year.

The core inflation forecast moved up 0.2 percentage points for this year and 0.1 points for 2027, to 2.7% and 2.2%, respectively – matching our expectations. More surprisingly, the median real GDP growth forecast was also revised higher, by 0.1 and 0.3 points for 2026 and 2027, to 2.4% and 2.3%. That was more optimistic than we anticipated and may not fully reflect the potential drag from higher oil prices.

At his press conference, Chair Powell struck a mildly hawkish tone. While the median rate forecast was unchanged, he noted “there was actually some movement toward fewer cuts” among participants — a shift reflected in the average dot, which rose 5 basis points for 2026.

Powell also acknowledged that the ongoing oil shock is likely not fully captured in the Fed’s forecasts, saying “nobody knows” what will happen or what the effects will be. He downplayed the updated projections given elevated geopolitical uncertainty, remarking that “if ever we were going to skip an SEP, this would be a good one.”

We continue to expect two additional rate cuts totaling 50 basis points in 2026, though risks are skewed toward a slower pace that could push the second cut into 2027. Near-term inflation pressures are likely to keep the Fed on hold until inflation moderates more decisively – an outcome unlikely before later in the year.

Mixed data overshadowed by geopolitics

Since the last Fed meeting, economic data have been uneven and the outlook cloudy. But traditional data-driven uncertainty has been vastly overshadowed by geopolitical volatility. The ongoing war in the Middle East has sent oil prices to nearly $100 per barrel, up from a prior three-month average near $60. That spike carries significant implications for the economic outlook.

Assuming oil prices remain near current levels, we estimate headline inflation will run approximately 0.8 percentage points higher this year than it would have absent the oil shock. Core inflation – which strips out direct energy price effects – will likely also face upward pressure, since oil is an essential input across the economy. We estimate the oil shock will add roughly 0.3 percentage points to core inflation this year.

Higher oil prices also compress real incomes and will likely weigh on consumption. The good news: U.S. consumers now allocate less than 4% of overall spending to energy – down 2 percentage points from 2014 and 5.5 percentage points from the 1982 peak. Meanwhile, the U.S. energy-producing sector has grown considerably, and higher oil prices should spur investment there, partially offsetting the drag on growth. On net, we expect the oil shock to reduce GDP growth by roughly 0.25 percentage points this year.

Setting geopolitics aside, recent economic data have been mixed. Job growth accelerated to 126,000 net jobs added in January but reversed sharply in February with 92,000 net jobs lost. The unemployment rate ticked up to 4.4%, though it remains below last year’s peak. The quits rate, layoff rate and job openings all point to a broadly steady labor market. We continue to forecast a flat unemployment rate this year, though a geopolitically driven growth slowdown could weigh on labor conditions.

Recent inflation data have largely met expectations. Core PCE inflation came in at 3.1% year-over-year in January, in line with our forecasts. While that remains well above the Fed’s 2% target, the bulk of the overshoot is attributable to goods prices pressured higher by tariffs – a dynamic that should ease later this year.

What does this mean for investors?

The economic outlook remains healthy, if highly uncertain. The Fed is still likely to resume rate cuts later this year. Against this backdrop, we favor allocations to sectors and asset classes that are relatively insulated from geopolitical risks and well-positioned to benefit when rate cuts resume.

In equities, we find dividend growth stocks attractive. These are companies with strong earnings potential, healthy balance sheets and sustainable dividend policies – characteristics that have historically enabled them to deliver competitive returns in rising markets while providing a measure of defense during volatile periods and drawdowns. The steady income potential from dividends can complement capital appreciation, helping limit variability, offset inflation and contribute meaningfully to total return over time. Persistent geopolitical tensions, softening labor market signals, concerns about AI overinvestment and still-sticky core inflation all reinforce the case for high-quality companies with strong capital flexibility and a commitment to growing dividends.

We also see value in companies insulated from rapid technological change, including commercial real estate and global infrastructure. These sectors exemplify what we call the “HALO” dynamic – heavy assets, low obsolescence. HALO companies focus on large, capital-intensive physical assets that are difficult to displace: moving energy, goods and people rather than processing information. Their cash flows tend to be stable and inflation-linked, offering meaningful protection in an uncertain geopolitical climate.

For commercial real estate, the HALO lens highlights the appeal of property types tied to the physical economy – logistics facilities, apartments, senior housing and retail centers, among others. These assets typically benefit from productive life cycles and embedded supply constraints. The case may be even stronger for global infrastructure. Electric grids, pipelines, railways, toll roads, ports, airports and water and waste systems are heavy assets with exceptionally low obsolescence risk, anchored by indispensable networks and high structural barriers to entry.

In fixed income, we see opportunity in preferred securities. Roughly 80% of preferreds are issued by banks, insurance companies and utilities – sectors subject to rigorous regulatory oversight and currently supported by strong fundamentals. Banks continue to beat earnings expectations and pass the Fed’s annual stress tests. Insurance companies hold near-record surplus capital and are posting record annuity sales. Utilities are benefiting from structural tailwinds, including surging power demand driven by AI data centers and the broader electrification of the economy.

Technicals are also supportive: net supply this year is expected to be roughly flat. U.S. bank issuance may actually be negative, while utilities and energy issuers will likely bring more supply to fund AI infrastructure. We anticipate further yield curve steepening if the Fed resumes rate cuts, which should benefit banks by improving net interest margins. U.S. mergers and acquisitions activity has already jumped 68% year-over-year in 2026, and we expect continued momentum in M&A and the IPO market to bolster fee generation for banks.

Finally, some preferred securities pay qualified dividend income (QDI), taxed at 20% rather than higher ordinary income rates – a feature that income-seeking investors may find particularly compelling.