SGH Macro Advisors produces concise, forward-looking proprietary reports on the major central banks and on key economic and policy developments that drive global bond, equity, and currency markets.
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Highlights
The Fed finds itself in a policy bind of its own making, having misjudged both the resilience of the labor market and the persistence of inflation, errors compounded by cutting rates too aggressively in 2025. With the March jobs report showing continued labor market strength and inflation running well above target, rate cuts are effectively off the table for the foreseeable future, with SGH assigning a limited probability to a cut in 2026.
WASHINGTON (AP) 4/8/26
The number of Federal Reserve policymakers willing to consider an interest rate hike this year rose between the January and March meetings, as higher gas prices stemming from the Iran war threatened to worsen inflation in the coming months.
Minutes of the Fed’s March 17-18 meeting, released Wednesday, showed that “some” of the central bank’s 19 policymakers on its rate-setting committee supported changing their post-meeting statement to reflect the potential for a future rate hike. That is an an increase from “several” in January. The Fed doesn’t disclose precise numbers of how many officials supported each position, but in Fed jargon, ‘some’ is considered more than ‘several.’
And “many” of the officials pointed to the risk that higher oil and gas prices could keep inflation elevated for “longer than expected, which could call for rate increases” to push inflation back down.
As relayed from Beijing:
To prevent the ongoing US-Israel war against Iran from escalating into a regional war or even drawing in China, Russia, and European nations, Beijing and Moscow have recently engaged in intensive diplomatic consultations regarding the situation in the Middle East. China’s president Xi Jinping and Russia’s president Vladimir Putin have each, through special channels, attempted to persuade US President Donald Trump and Iran’s new Supreme Leader Mojtaba Khamenei to implement an immediate ceasefire and return to the negotiating table.
The strongest signals Xi and Putin sent to Trump and Khamenei were, respectively, do not launch a ground war against Iran, and do not close the Strait of Hormuz.
Bloomberg 4/8/26
A Chinese diplomat said Beijing had made its
“own efforts” in pushing for a ceasefire between the US and
Iran, shortly after Donald Trump credited China with playing a
pivotal role in that deal.
Chinese Foreign Ministry spokeswoman Mao Ning on Wednesday
listed the efforts her country had made in recent weeks to
deescalate the conflict at a regular briefing in Beijing,
without directly addressing reports China helped convince Tehran
to reach the truce.
“China has consistently advocated for a ceasefire and to
resolve the conflict through political and diplomatic means, and
to achieve long-term stability in the Gulf and Middle East
region,” she said, when asked about the detente. “China made its
own efforts in this regard.”
There is not yet convincing evidence that the labor market is deteriorating. Absent such deterioration, the Fed will be challenged to cut policy rates when inflation is running well above target year after year. That said, labor market data is neither unambiguously strong nor weak. On the “good news” side of the ledger is near-steady labor demand as measured by job openings, steady jobless claims indicating layoffs remain low, and ongoing wage growth above the pre-pandemic pace. On the “bad news” side of the ledger is weak and narrow job growth, a steady to slowly rising unemployment rate, a continued low job-finding rate, dour worker perceptions of the labor market, and an indication that payrolls last summer were overstated.
Bloomberg 4/7/26
US job growth rebounded in March and the unemployment rate unexpectedly fell, suggesting the labor market was stabilizing as the Iran war began.
Nonfarm payrolls rose 178,000 last month, the most since the end of 2024, after revisions showed a sharper decline in February, according to Bureau of Labor Statistics data out Friday. That was higher than all estimates in a Bloomberg survey.
The solid increase will likely reinforce the Federal Reserve’s focus on inflation risks amid a rapid run-up in energy prices sparked by the war in Iran.
The outsize increase in payrolls in March followed a revised 133,000 drop in the prior month, which marked one of the biggest declines since the pandemic. But on average, payrolls rose 68,000 in the first three months of this year, the strongest run in almost a year.
The Bank of England’s (BOE) threshold to a rate hike is high and only if there are signs of energy-driven inflation feeding into expectations and wage-setting behaviour would the Bank hike rates, in June or August.
In a clear gesture to its inflation mandate, the Monetary Policy Committee (MPC) set aside its pre-Iran majority preference to cut rates, and voted unanimously to pause policy at 3.75% where it will likely stay for some months.
Members don’t want to hike but they will if inflation dynamics worsen in a persistent way.
While tightening remains conditional on clear evidence of inflation persistence, to us, the balance of risks suggests a hike may ultimately not be required if the energy shock proves temporary and second-round effects fail to materialize.
Reuters – London – 4/1/26
Bank of England Governor Andrew Bailey said on Wednesday that markets were still getting ahead of themselves by pricing in interest rate hikes by the central bank in response to the hit to the British economy from the Iran war.
“(The market)’s still pricing us to raise rates. I would still say that is a judgment markets have to make but I think they’re getting ahead of themselves,” Bailey said.
The US-Israeli war with Iran is unlikely to deter the Bank of Japan (BOJ) from nudging its policy rate to 1% at its April 27-28 meeting, despite topline slower inflation in February and the detail from the BOJ’s January policy meeting that showed Board members still agonizing over whether to declare inflation at target.
We’ve repeatedly written that the April meeting remains fully live for a 25 basis-point increase to 1%, and that we expect the BOJ will consider another move likely in July as well as a possible third move later this year (see SGH 2/24/26; “BOJ: Reported Caution Won’t Block April Hike”).
Though the timing of rate moves subsequent to April has been thrown into flux by the Middle East conflict, which sent oil prices surging, the BOJ will be even more keen to prevent energy costs from seeping into inflation expectations.
Bloomberg 3/30/26
The Bank of Japan’s policy board presented a
hawkish posture in a summary of opinions aired during their
meeting earlier this month, with one member hinting at the
possibility of having to respond to the Middle East conflict
with a bigger rate hike than those recently undertaken.
“If there are no signs of a significant deterioration in
the economic environment or in the wage setting stance of small
firms, the bank will need to raise the policy interest rate
without hesitation,” one of nine board members said, according
to a summary of the March 18-19 meeting released Monday.
Bottom Line: The Fed is stuck in a “wait and see” mode as the inflationary consequences of the Iran conflict push discussion of rate cuts not just to the back burner, but off the stove entirely. The Fed, however, would need to see a hotter labor market, and with that the threat of second order impacts on inflation from the oil shocks, before a discussion of rate hikes can begin in earnest.
Wall Street Journal 3/30/26
Federal Reserve Chair Jerome Powell said Monday the central bank is inclined to hold rates steady and look past the energy shock from the war in Iran but cautioned that it might not be able to sit on the sidelines if rising prices begin to shift the public’s expectations about inflation over time.
Powell said energy disruptions have historically been short-lived and that the standard central-banking response is to wait them out. But he said the Fed couldn’t take that for granted after years of elevated inflation, and that officials would be watching closely for any signs the public is starting to expect persistently higher prices.
“You can have a series of these supply shocks and that can lead the public generally — businesses, price setters, households — to start expecting higher inflation over time. Why wouldn’t they?” Powell said.
Powell tiptoed away from saying how the Fed would answer that riddle. “We will eventually maybe face the question of what to do here. We’re not really facing it yet because we don’t know what the economic effects will be,” he said during a question-and-answer session with undergraduate students at Harvard University’s introductory economics course.
Bottom Line:The SNB will use FX interventions to prevent a stronger franc from lowering inflation below the 0%-2% target, with Swiss officials continuing to resist cutting interest rates below 0% at their March 19 meeting. The board is willing to look through negative inflation prints this year because it continues to expect inflation to be on target over the medium term.
Bloomberg 3/19/26
The Swiss National Bank restated its heightened readiness to sell the franc as officials held back again from the more drastic step of cutting borrowing costs into negative territory.
Policymakers led by President Martin Schlegel left their benchmark at zero on Thursday for the third consecutive meeting, as predicted unanimously by economists. Officials kept up their commitment to sell the currency if required to prevent its gains from weighing too much on inflation.
“A rapid and excessive appreciation of the Swiss franc poses a risk to price stability,” Schlegel told reporters in Zurich. “To counter this risk, our willingness to intervene in the foreign exchange market has increased.”
Bottom line: A report that Japan’s PM Sanae Takaichi expressed caution in her meeting with the BOJ’s Kazuo Ueda may reflect concern over the pace of rate hikes but not likely the direction of policy. The BOJ remains committed to data-dependent normalization, with April fully live for a 25 bps increase, a further move likely in July, and a potential third adjustment later this year if inflation and wage momentum persist. Headline noise should not be interpreted as a change in the Bank’s underlying trajectory.
Bloomberg 3/19/20
Bank of Japan Governor Kazuo Ueda kept the
possibility of an April interest rate hike on the table after
leaving policy unchanged Thursday amid uncertainty over the
impact of the Middle East conflict on the economic outlook.
Speaking at a press briefing after the central bank’s
decision he said that downward pressure on the economy stemming
from the impact of the hostilities would likely be temporary.
“Even if economic growth were to decline, if that
development is temporary and there’s not so much impact on the
trajectory of the price trend then of course it will be possible
to raise interest rates,” he said.
Powell will be challenged to strike a dovish tone in the press conference. Rising energy prices will only further antagonize Fed hawks, who at the January FOMC meeting argued in favor of a statement that emphasized two-sided risks to the outlook. Powell downplayed any discussion of rate hikes at the January press conference, but journalists can push the question more directly this week. Powell will likely stress that with policy near neutral it is well positioned to manage the risks to both sides of the Fed’s mandate, although presumably that means hiking rates if necessary.
We expect only one dissent. We think rising oil prices provide space for both Governor Chris Waller and Vice Chair of Supervision Michelle Bowman to support holding policy despite their concerns about the job market. It’s one thing to look through higher headline inflation and not hike rates. It’s another thing to cut rates into higher headline inflation with core inflation above 3%. That’s just like embracing the 1970s. Similarly, reverse engineering an inflation forecast to maintain a one cut baseline in the SEP is also like embracing the 1970s. We expect Governor Stephen Miran to dissent. When you only have a hammer, everything is a nail.
Bloomberg 3/18/26
Treasuries came under selling pressure on Wednesday, led by the front-end of the curve after the Federal Reserve held rates steady in an 11-1 vote, while upgrading growth projections and still forecasting one cut by the end of this year. In the press conference, Chair Jerome Powell said there couldn’t be rate cuts until there is progress on inflation and didn’t rule out potential for rate hikes in the future, though that’s not a base case for the Fed
Bloomberg 3/18/26
*FED SAYS GOVERNOR STEPHEN MIRAN DISSENTS IN FAVOR OF RATE CUT