The Federal Reserve's inaction is a strategic wait, with Chair Powell's tone turning noticeably more hawkish.

Following the January FOMC meeting, two subsequent labor market reports revealed that non-farm payrolls in the US increased by only about 10,000 jobs over the past three months (including December 2025), indicating continued weakness in job creation. The February CPI came in at 2.4%, meeting expectations, while the January PCE was 2.8%, slightly below forecasts, showing no significant decline in inflation. However, the Fed's previously employment-supportive policy stance had kept market hopes alive for three rate cuts within the year. That illusion was shattered by the outbreak of conflict in the Middle East. Oil prices surged from around $70 to over $100, prompting immediate market concerns about rising inflation, falling employment, and shrinking consumption, evoking images reminiscent of the 1970s stagflation nightmare. Ahead of the March meeting, market-implied probability of a rate cut was zero, with the two-year Treasury yield, which bond king Gundlach suggests effectively leads policy rates, hovering around 3.75%.

This month's decision maintained the policy rate within the 3.5%–3.75% range. There was one dissenting vote, likely from President Trump's ally, Milan. The market had anticipated that Fed Governor Waller would continue advocating for a rate cut to support employment, but it appears the Middle East situation prompted a shift towards supporting the committee's consensus.

The Summary of Economic Projections (SEP) and the dot plot revealed: * GDP growth of 2.4% (up from 2.3% in December and 1.8% in September). What drove this upward revision? * Unemployment rate of 4.4% (unchanged from December and September projections), holding steady. * Inflation of 2.7% (up from 2.4% in December and 2.1% a year prior). A goal deemed achievable two years ago now seems abandoned. * Policy rate of 3.4% (unchanged from December and September), implying at most one rate cut. Is this realistic?

Journalists' questions focused intensely on monetary policy and the US economy amid rising oil prices: "Inflation has been above target for five years; will you remain idle as oil prices surge?" "Is policy on hold to curb inflation or to preserve ammunition for an economic downturn?" "Is there internal discussion about rate hikes?" "During the Gulf War, policy prioritized the economy; will you do the same?" "Can increased oil drilling offset weak consumption caused by higher prices?" "With such poor jobs data, do you privately see greater risks to employment?" "Are you confident the tariff impact on inflation is temporary?" "Can AI lower inflation?" The range of questions indicated rapidly expanding concerns within the financial media.

The following section omits the journalists' questions. Except for commentary, the text consists of direct quotes from Fed Chair Powell's press conference.

**Monetary Policy Direction** Inflation has remained elevated in recent years and faced new shocks during its decline, such as tariff-induced goods inflation. We are closely monitoring the evolution of the one-time impact of tariffs on goods inflation. We need to see progress on the 50-75 basis points of the 3% core inflation attributed to tariffs. The standard approach to energy price shocks is to look through them without policy reaction. This depends critically on well-anchored inflation expectations and must be considered against the backdrop of five years of above-target inflation. Deciding to look through such a shock is not an easy choice.

Why does the projection still show one rate cut? With 19 committee members, there are 19 reasons. The median policy stance in the dot plot is unchanged, but the trend of fewer cuts is clear, with 4-5 members reducing their projection from two cuts to one. Maintaining one projected cut reflects an expectation that tariff effects will fade and inflation will continue improving by mid-year. However, these projections are conditional on the outlook; if expected inflation improvement does not materialize, then there will be no cuts.

The higher inflation forecast for this year incorporates oil price effects, which don't directly impact core measures. The upward revision mainly reflects slower-than-expected improvement in core goods and services inflation, with uncertainty about how long tariff effects will persist.

No one knows the full economic impact of external shocks; there is little conviction behind these forecasts. A large, sustained oil price increase would certainly hurt consumption and household income, but the impact could be smaller or shorter than feared. Several participants noted the difficulty of forecasting under these conditions, writing down their best guesses despite low confidence, leading to minimal changes from previous projections. Meanwhile, economic growth is solid, goods inflation remains affected by tariffs, and the labor market has shown little change since September, with a still-low unemployment rate. But we don't know how these influences will evolve.

Some participants at this meeting suggested a rate hike could be possible next time, as was also mentioned last meeting. However, the vast majority do not see it as a base case, though we haven't ruled it out entirely. A few participants suggested incorporating two-sided guidance in our policy communications.

Many commodities are affected by shipping disruptions, but we cannot control the situation; we can only wait and observe like everyone else. We don't want to speculate on the duration or price impacts, or consumer reactions; we will monitor developments.

I often say we will learn a great deal by the next meeting. Significant new information on growth, the outlook, and the Middle East conflict will emerge over the next six weeks. How this will affect decisions is unknown. We discussed various scenarios, but they are highly uncertain. We don't know what will happen and won't guess about specific outcomes; we will watch how events unfold.

The US economy has proven remarkably resilient to past shocks. In 2023, we raised rates significantly, and despite nearly universal economist predictions of a recession, none occurred—a surprising outcome. I don't know what will happen next with the economy or the Middle East situation, and I won't speculate.

Economic projections do not constrain the policy path. Participants will readily revise their forecasts; these are just current thoughts, subject to change based on future developments. Forecasts do not prevent policy adjustments, as forecasting errors are common. Given the high uncertainty, extra caution regarding economic projections is warranted.

*Zero Degree Commentary: While the Middle East conflict and oil price surge have significantly increased inflation pressures, and the Fed maintained rates while still projecting one cut—initially seeming dovish—a closer listen to Powell reveals a hawkish tilt. He noted the standard practice of "looking through" energy shocks but emphasized the prerequisite of anchored expectations, hinting that five years of above-target inflation makes this a non-standard situation. He conditioned the rate cut projection, stating, "if expected inflation improvement does not materialize, then there will be no cuts." He also revealed that some participants suggested considering a hike next meeting, adding, "we haven't ruled it out entirely." Powell was notably candid, repeatedly stating, "I don't know what will happen, and I won't guess." Most strikingly, he cautioned against placing too much faith in forecasts, essentially admitting the committee is compelled to produce them but lacks conviction and can change them anytime. The overall message seemed to be: holding steady is difficult but necessary; a cut is desired but may not happen; forecasts could be revised, or even a hike considered. Powell's inaction is a tactical pause, and his stance has shifted hawkish. The numerous "I don't know" statements suggest the FOMC is currently grappling with significant uncertainty, which is understandable.*

**Macro Environment and Labor Market** The traditional monetary policy response to energy shocks is to look through them, provided inflation expectations remain stable. Higher oil prices negatively impact consumption and employment but positively affect producers through increased oil company profits and drilling activity. However, drillers don't automatically ramp up production when prices exceed $70; they carefully assess long-term price trends. Production hasn't expanded yet but might in the future. An oil shock can suppress consumption, affect employment, and push up inflation.

We are aware of central bank history in fighting inflation but will base decisions on current facts, not over-interpret the past. We've faced the pandemic, tariff shocks, and now rising oil prices, with unknown magnitude and duration. The repeated nature of these shocks raises concerns about their potential effect on market inflation expectations. We are committed to ensuring expectations remain anchored at 2% and will do whatever it takes to achieve price stability.

We've experienced several supply shocks and have done much thinking on the matter. Supply shocks present a completely different economic problem because they can create a conflict between the Fed's dual mandates. The pandemic was a one-time shock, tariffs are a one-time shock, and the oil supply disruption from the Ukraine conflict was too. Many articles debate if this signifies a changed world; opinions vary, but the fact is supply shocks have been more frequent over the past five years than historically.

Short-term inflation expectations have risen significantly for obvious reasons. However, various surveys show long-term inflation expectations have remained stable and well-anchored at 2% for a long time. We all agree that shocks from geopolitical conflicts demand utmost attention regarding their potential impact on prices.

Participants raised the GDP growth forecast by 0.1%, reflecting belief in productivity gains. While recent inflation and employment risks create policy challenges, the situation is far from stagflation. The 1970s featured double-digit unemployment and terrifyingly high inflation. Currently, unemployment is near its long-term normal level, and inflation is only about 1 percentage point above target. Stagflation is a much worse scenario.

The economic impact of current turmoil is uncertain. A $1 per gallon gasoline price increase is felt by households. I hope the impact is brief, but I won't pretend to know what will happen; no one does. We must watch how the situation evolves.

It's difficult to say if policy should currently focus on safeguarding growth. This depends on whether tariff effects fade, allowing inflation to fall, the extent and duration of shock impacts on prices, and, crucially, the behavior of inflation expectations.

The January jobs report was strong, February's was weak; combined, they average out. February was affected by strikes and weather, reducing payrolls by 80,000, but overall labor market indicators are stable. The concern is the very low level of job creation. Over the past six months, adjusting for estimated statistical overstatement, net job growth is essentially zero. This equilibrium carries downside risks and is unsettling. It might reflect the economy's adaptation to extremely tight labor supply, resulting in a zero job growth equilibrium—an unprecedented situation historically. Arithmetically, the breakeven employment growth rate is zero. We are highly attentive and concerned, but this can also be seen as a consequence of immigration policy.

Labor productivity growth has been significant over the past 4-5 years, unrelated to AI, possibly stemming from business optimization during the pandemic labor shortage. Forecasters are often skeptical of productivity gains because they are rare and often get revised away. I didn't expect to see such sustained improvement. Ultimately, productivity gains leading to higher incomes are positive.

In the short term, data center construction will pressure goods and services prices, marginally raising inflation and potentially the neutral rate. However, as it helps expand output and boost productivity, it could eventually exert downward pressure on inflation. The net effect depends on the balance between demand and supply growth, which remains uncertain.

*Zero Degree Commentary: Solid economic growth led the Fed to nudge up its 2024 GDP forecast. However, labor demand remains weak, though restrictive immigration policy has limited labor supply, keeping the unemployment rate relatively normal. Powell termed this a "zero job growth equilibrium," attributing it to multi-year productivity gains—essentially, the economy producing more with fewer workers. The Fed hasn't fully credited AI, preferring to view it as systemic adaptation to labor shortages caused initially by the pandemic and then immigration policies. Powell's expressed concern about this equilibrium seems performative. If the Fed truly accepted the productivity story, weak labor demand would be a structural outcome, limiting monetary policy's effectiveness. Lowering rates to spur AI investment might further reduce job creation. Powell rejected focusing policy on growth support, dismissed stagflation risks, and refuted the idea that AI investment would immediately lower inflation. In his view, key macro risks are oil price shocks and tariff-inflation, while global supply instability is a major uncertainty. The positive news of productivity gains also harbors concerns. The world is different now.*

**Inflation Risks** Current policy is at the upper end of neutral or slightly restrictive. The largest expected contributor to lower inflation is the fading one-time effect of tariffs, which may take 9-12 months (starting from late last year). We hope goods inflation will revert to its long-term trend post-tariffs; it was negative for many years and near zero pre-tariffs, versus 2% now, clearly driven by the tariff shock, not Phillips curve dynamics. Policy should be slightly restrictive but not overly so, given labor market downside risks. Our framework requires balancing inflation's call for tightening against employment's need for support; the current stance is appropriate.

The failure of non-housing services inflation to decline as expected is disappointing. With no inflationary pressure from the labor market, this category should be falling. We expected housing inflation to fall, followed by goods and then non-housing services. Why this hasn't happened is a good question.

Assessing whether inflation or employment poses the greater risk is difficult. Employment is broadly stable, with both supply and demand having fallen significantly (ratios are more informative). The unemployment rate has been largely unchanged since September. Core inflation is 3%, headline is 2.8%, nearly a percentage point above the 2% target for an extended period, which is concerning. Our focus is returning inflation to 2%, now complicated by oil prices, making the risk balance hard to call.

The price impact of tariffs is uncertain but should be a one-time effect. Inflation involves persistent, year-after-year price increases, so unless tariffs rise annually, the effect should be temporary. Similarly, energy prices are often viewed as having a one-time impact, as they typically reverse. The duration of tariff passthrough is uncertain, akin to post-pandemic inflation taking two years longer to fall than expected. We must be humble about how long the tariff shock will last. Fed staff have estimated a path for its dissipation, which should be visible this year. Court rulings have lowered some tariffs, but government statements suggest potential reinstatement through other channels, which we must consider.

Recent years saw globally pandemic-induced inflation. Real wage growth in the US has been good over the past three years but needs to continue for several more to improve household purchasing power perception. People feel financially squeezed as inflation permeates various expenses, like rising insurance costs. We are acutely aware of inflation and public sentiment, reinforcing our commitment to the 2% target.

We are prepared to take all necessary actions to achieve price stability. We monitor a broad range of oil and petroleum products, not just diesel, as they affect production and transportation costs for many items, significantly impacting headline inflation and gradually affecting core measures. We are highly attentive to oil price movements but uncertain about their magnitude and duration; we must wait and see.

*Zero Degree Commentary: As economist Milton Friedman stated, inflation is always and everywhere a monetary phenomenon. Thus, the Fed's reluctance to fully acknowledge this is understandable. The Fed categorizes price pressures separately: pandemic inflation was transitory, goods inflation is a tariff effect, non-housing services inflation is "a good question." The undeniable fact is five years of above-2% US inflation, whose compounding effect has fueled public discontent, turning consumer affordability into a political issue. A 30% recent gasoline price increase to $3.91/gallon, if sustained, would quickly squeeze the consumption that drives 70% of US GDP. When asked to weigh employment against inflation risks, Powell emphasized inflation. Since late last year, the Fed has shifted focus from weak employment back to inflation. This hawkish tilt pressures capital markets. Ultimately, a central bank's core mandate is price stability. Employment issues belong to the market or government; the ECB and BOE lack a statutory dual mandate.*

**About the Federal Reserve** If a new Chair is not confirmed by the end of my term, I will continue to serve as Acting Chair, as required by law and past precedent. Since the topic arose, I'll add that I will not step down from the Board of Governors until the ongoing investigation is fully concluded. I have not decided whether to remain on the Board after a new Chair is confirmed and the investigation ends.

Regarding changes to Fed communication, the answer is none are planned. We reviewed aspects of the SEP and proposed some ideas, but participants showed little enthusiasm, so no changes are intended.

Central bank independence helps us achieve our dual mandate effectively. Nearly all advanced economies with market-based democracies accept central bank independence as beneficial for price stability. The Fed is accountable to Congress, and both parties support its independence.

*Zero Degree Commentary: Beyond tariff-inflation and oil shocks, the Fed itself has become a source of uncertainty for the US economy, largely due to former President Trump's unconventional actions. His social media attacks on Powell, Justice Department lawsuits against Fed officials, and premature announcement of a preferred successor attempt to pressure the Fed into easier policy. Markets are highly sensitive to perceived threats to central bank independence, especially with elevated inflation. Rising long-term yields, a weaker dollar, and surging gold prices reflect dollar system risks and concerns about independence. Powell's announcement of his intent to serve as Acting Chair and remain on the Board signals a desire for continuity and policy neutrality, suggesting Fed independence remains intact. How Trump will respond—perhaps labeling Powell "the lingering Mr."—remains to be seen.*

**Zero Degree Summary (Key Points):** Absent the Middle East conflict, this meeting likely would have resulted in a hold due to lackluster inflation improvement, with February's core PPI at 3.9% well above expectations, set to influence PCE. Current risks extend beyond energy to potential disruptions in a range of commodities from oil to fertilizers, metals, and even specialty gases for chip manufacturing. The old military adage, "No battle plan survives contact with the enemy," now applies to the Fed's policy path projections. This meeting signaled two crucial shifts: raising the long-term GDP growth estimate from 1.8% to 2%, and lifting the long-run neutral policy rate to 3.1% from 2.5% three years ago. This suggests the Fed is beginning to acknowledge sustained US productivity gains, a recognition last notably made by former Chair Greenspan three decades ago. Sustained productivity growth is rare, signifying a higher economic output efficiency plateau—the fundamental driver of wealth creation that can lower inflation, albeit with structural pressures on employment. Doesn't that justify rate cuts? Not so fast. Frequent supply shocks keep inflation stubbornly high, and massive, competition-like investments are pushing up the neutral rate. Rate cuts remain a mirage in the fog.

**What is "Zero Degree Interpretation"?** The author avoids proactive editing of content, approaches without preconceived questions, and merely observes, records, and presents the nuanced exchanges of the press conference as a "sashimi platter" (lightly arranged with wasabi and soy sauce), trusting readers' discernment. The author refrains from economic theory analysis, instead using a curious ear to capture subtleties, metaphors, and implied meanings within委婉语and晦涩language. The author is a market participant (countless such authors constitute the market), not a purely rational actor, skeptical of macroeconomic management dogma, seeking primarily to understand what the Fed is thinking, what the market thinks the Fed is thinking, and ultimately, whether to align with or counter prevailing market sentiment regarding the Fed (in the Fed-market dynamic, who is judging the beauty contest?).

(The author works in manufacturing management and is a seasoned market observer.)