Allianz Investment's Chief Investment Officer for public markets, Michael Krautzberger, anticipates that the Federal Reserve will maintain interest rates unchanged during its March 17–18 meeting, though a minority of members may lean toward a rate cut. While the outcome is likely to align with market pricing and general expectations, attention will shift to the persistent divergence between inflation and employment data, as well as potential spillover risks from Middle East conflicts. The Federal Open Market Committee (FOMC) struck a moderately hawkish tone at its January meeting, setting a more cautious policy stance. Meeting minutes indicated that most members viewed sustained above-target inflation as a significant risk, with some advocating for "two-way flexibility" in rate decisions rather than emphasizing only the possibility of cuts. February's employment figures fell short of expectations, and although other indicators such as the Consumer Price Index (CPI) appeared moderate, the Fed’s preferred inflation gauge—the core Personal Consumption Expenditures (PCE) price index—remained around 3%, showing no clear decline. Ongoing Middle East tensions introduce additional risks to the economic outlook. Should conflicts persist, resulting stagflationary pressures could make it harder for the Fed to downplay short-term supply-side shocks. Historically, unless recession risks rise significantly, the Fed has rarely eased monetary policy amid sharp oil price surges and persistently high inflation. Updated economic and interest rate projections are likely to reflect these uncertainties. Allianz expects the Fed to moderately temper its December "Goldilocks" outlook—characterized by strong growth, improving labor markets, and steadily declining inflation. Although the median forecast of one rate cut each in 2024 and 2025 may remain unchanged, the distribution of projections could skew toward "less easing." Overall, Fed Chair Jerome Powell is expected to reiterate a wait-and-see approach, noting limited near-term policy visibility but expressing cautious optimism about medium-term supply-side improvements from AI and productivity gains. Allianz’s base case continues to anticipate one final rate cut in the second half of the year under incoming Chair Kevin Warsh; however, unless clearer signs of economic or labor market slowdown emerge, further monetary easing is unlikely. Against this backdrop, the firm maintains a short position on U.S. Treasuries and favors a steeper yield curve between seven-year and thirty-year bonds.