The Federal Reserve shows hawkish signals, oil prices don't fall, and stock market pressure persists

The Federal Reserve held interest rates at 3.5%—3.75% steady on Thursday, in line with market expectations, but its projections for the future path of rates are clearly more hawkish.

Under the pressure of persistently surging oil prices, expectations for the Fed’s first rate cut this year have been pushed back to September, and global stock markets are also under heavy strain.

Fed rate-cut expectations pushed back

In its Economic Outlook, the Federal Reserve raised its forecasts for inflation and GDP growth for the current and next two years, while keeping the unemployment rate forecast unchanged. More noteworthy is the dot plot, which shows that committee members still expect one rate cut each in 2026 and 2027; but judging from the distribution, it is no longer as dovish as it was in December last year.

Although the Economic Outlook is relatively neutral, Powell still released some relatively hawkish signals at the press conference, saying he would not consider rate cuts until he sees inflation improving.

Meanwhile, the interest-rate market believes there will be no rate cuts before July next year; the interest-rate path is more hawkish than it was a month earlier (see Figure 1).

The Federal Reserve released its quarterly economic projections, with the biggest change being that its 2% inflation target shows no progress. The median of FOMC members’ forecasts indicates that the PCE inflation rate is currently expected to be 2.7% this year (2.4% in the December forecast), and it is projected to be raised slightly for 2027 to 2.2% (from 2.1% previously).

The Fed also slightly raised its forecast for real GDP growth to 2.4%, while keeping its unemployment rate forecast unchanged at 4.4% for this year; for next year, it is raised slightly from 4.2% to 4.3%.

As for the much-watched interest-rate projection “dot plot,” the most dovish member also returned to the consensus—last December’s dots near 2% disappeared, while the dots that had been hovering around 2.5%—2.75% were moved up to around 3%—3.125% (each dot represents one voting committee member’s view on interest rates). Overall, the stance is that the projected range for interest rates has narrowed, indicating the committee is moving toward a more gradual and smaller-cut rate path.

After the interest-rate decision was released, the two-year U.S. Treasury yield—more sensitive to rates—jumped sharply to 3.78%, hitting a 7-month high, which pushed the U.S. dollar index (DXY) back above the 100 level. On the surface, it looks like the shift in monetary policy boosted the dollar; but the real driver is the situation in the Middle East and the inflation risks and risk-aversion sentiment it brings.

Since changes in the Middle East situation, flight-to-safety funds have clearly leaned more toward crude oil and the U.S. dollar. Gold has fallen back from its highs and broke below the 50-day moving average; both the technical picture and the news flow suggest a likely bearish bias in the near term.

Watch for a rebound from oversold levels during the day, but initial resistance appears in the 4890—4900 zone; next, it could be around 4970, the lower end of the prior consolidation range. The downtrend line since March continues to act as a key resistance near 5040. Before the market fully digests the Fed’s decision, shorting the rebound is worth paying attention to. As shown in the chart (see Figure 2), to the downside, if it breaks the trend line since August, gold could drop toward 4650 dollars and 4500 dollars.

Oil prices remain under pressure

Since the U.S. launched military strikes against Iran, the logic in financial markets has gradually become clearer: safe-haven capital flows into crude oil and the U.S. dollar; inflation risks have forced global central banks to end easing policies and even move into a tightening cycle; this in turn puts pressure on gold and leads to sell-offs in global stock markets.

Because everything traces back to crude oil, whether and when crude oil will pull back is the key to the market’s direction.

As events have expanded, multiple oil and gas facilities in Gulf countries have been hit by airstrikes, forcing multiple countries to cut production sharply. Since rebuilding infrastructure requires a longer cycle, the market is even more worried than about the Strait of Hormuz being blocked.

The chart below (see Figure 3) shows that the benchmark crude oil price in the Middle East and the premium in the Europe and U.S. markets are about $50 apart. The former is the spot price sold to Asian countries, which more realistically reflects the current supply-demand relationship in the crude oil market and allows a reasonable inference that Asian countries will be hit by economic shocks first. The latter is the pricing system for the Atlantic Basin; the International Energy Agency (IEA) releases strategic petroleum reserves to provide a temporary buffer for Europe and U.S. markets, so prices have been hovering around $100.

But short-term strategic petroleum reserve stockpiles cannot cope with a prolonged supply disruption. Once Europe and the U.S. inventories become tight, WTI and Brent crude prices could follow with a catching-up rise. From this perspective, energy supply risk—and even an energy crisis—may be more serious than people imagine. The only thing that can truly bring oil prices back to calm is a easing of the situation in the Middle East.

Global stock markets under pressure

For equities—especially U.S. stocks—judging from the drawdowns of the past two-plus weeks, it seems the risk of a global energy crisis may not yet be fully priced in. After all, the U.S. is a net energy exporter, which can dilute some of the impact, but a strong dollar and high inflation are still burdens that the stock market cannot bear.

About one-quarter of global seaborne crude oil trade passes through the Strait of Hormuz. Estimates from institutions show that after excluding the portion that can be diverted to the Red Sea or the Persian Gulf, the actual affected crude oil supply could exceed 10 million barrels per day.

It is worth noting that before geopolitical conflict in the Middle East, the fundamentals of global crude oil supply had already shown an oversupply pattern—predicted oversupply in 2026 exceeds 3.17 million barrels per day, the highest level in recent years. However, the conflict has led to at least 6.7 million barrels per day of capacity being cut. Whether the energy market shifts from oversupply to tightness depends on how long and how intense the conflict lasts.

Although the U.S. is a net exporter of crude oil, the surge in oil prices undoubtedly hits inflation. Asian countries are mostly crude oil importers, and the challenges they face appear even more acute. Although China, Russia, and IEA member countries hold some strategic reserves, releasing those reserves can only smooth short-term volatility in the spot market and cannot fundamentally eliminate the war-related premium.

From a micro perspective, rising energy prices increase corporate costs and squeeze profits; delaying rate cuts will keep borrowing costs higher. For consumers, this means a decline in disposable income and willingness to consume, which in turn drags down corporate revenues. From a macro perspective, a strong dollar could hit companies’ overseas revenues. For S&P 500 component stocks, 30%—40% of revenues come from overseas markets, and overseas revenues for technology companies account for as much as more than 50%.

Since the 1980s, whenever oil prices reached a historical or phase high, the S&P 500 has fallen into bear markets (see Figure 4).

Taking the Nasdaq index as an example (see Figure 5), although the index has continued to pull back over the past three weeks, among global stock markets it is still a relatively mild decline. AI panic has not yet combined with the risk of energy supply disruptions.

From the perspective of the bigger cycle, over the past half year the index has been in a high-range consolidation phase. On the 4-hour chart, it has also formed a narrower consolidation range. The lower edges of the range—24300 and 24000—naturally become key support, with hopes of forming a bottoming and rebound pattern. In the short term, watch the pressure in the 24800—24900 zone.

(This article was published in the March 21 issue of Securities Market Weekly. The author is a senior analyst at Gain Capital. The article only represents the author’s personal views and does not represent this publication’s position.)

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