News of the week summary - 22/03/2026

The Federal Reserve holds but raises its inflation forecast

The Federal Open Market Committee voted unanimously to hold the federal funds rate in its target range of 3.50 to 3.75 percent, the second consecutive hold following three quarter-point reductions in the second half of 2025. The decision itself was not in question. What markets focused on was everything else: the language in the statement, the quarterly economic projections, and the tone of the press conference.

The committee's Summary of Economic Projections told the clearest story. The Federal Reserve raised its 2026 PCE inflation forecast to 2.7 percent, up from 2.4 percent in December and above the central bank's 2 percent target. Its 2026 growth forecast held at 2.4 percent and unemployment at 4.4 percent, but the inflation revision was the one that mattered to markets. The committee's dot plot still showed a median expectation of one quarter-point cut in 2026, down from two cuts projected in December. But seven of nineteen participants now expected no cuts at all, up from six in December, and the statement acknowledged that the war in the Middle East had made the economic outlook "significantly more uncertain."

At the press conference, Chair Jerome Powell was careful with language. He declined to use the word stagflation, noting it had historically implied double-digit unemployment and double-digit inflation rather than the current situation, where the labour market remained broadly stable. He described the Fed's position as "well placed" to wait while watching the data, and said it was "too soon to know" how the conflict would affect the economy. Near-term inflation expectations had risen due to the surge in oil prices, he acknowledged, but he framed this as a supply-side shock that did not necessarily require a monetary policy response unless it fed into broader price pressures. The challenge Powell described was not unfamiliar: oil-driven inflation that the Fed cannot directly reduce through rate changes, set against an economy that had entered the conflict in reasonable shape. The question was whether waiting was wisdom or complacency.

Three more central banks hold on Thursday, each with its own warning

The day after the FOMC decision, the Bank of Japan opened the session in Asia by holding its policy rate at 0.75 percent. The vote was 8-1, with one board member dissenting in favour of an immediate increase to 1 percent, citing the upward risk to inflation from the war. The BOJ warned that the conflict was expected to exert upward pressure on inflation through higher crude oil prices, while also acknowledging that higher energy costs were likely to weigh on corporate profits and household real incomes. Japan sources more than 90 percent of its crude oil from the Middle East, nearly all of it through the Strait of Hormuz, making it among the economies most structurally exposed to the closure.

Later that Thursday, both the European Central Bank and the Bank of England announced holds in near-simultaneous decisions, completing a day in which four major central banks had addressed the same crisis without consulting each other on their conclusions. The ECB kept its deposit rate at 2.0 percent but significantly revised its economic projections. Headline inflation in the eurozone was now expected to average 2.6 percent in 2026, up from a December forecast of 2.2 percent. The governing council's statement said the war would have a "material impact on near-term inflation through higher energy prices" and that medium-term implications would depend on both the intensity of the conflict and how energy costs affected the broader economy. Markets were already pricing more than a 90 percent probability of an ECB rate hike before June.

The Bank of England held Bank Rate at 3.75 percent with a unanimous vote, but its language reflected the same dilemma. The statement noted that inflation was likely to be higher later in the year as the effects of higher energy prices passed through, and warned specifically of the risk of "material second-round effects in price and wage-setting" if businesses and workers began incorporating elevated energy costs into their own decisions. At the same time, the Bank acknowledged that growth was likely to weaken if the disruption persisted, and that a loosening labour market and tightening financial conditions would themselves act to restrain inflation over time. The difficulty for all four central banks was identical: a supply-driven inflation shock that monetary policy could not easily address, in economies where growth was decelerating and any rate increase risked amplifying the slowdown.

US industrial production grew for the fourth consecutive month

Against the backdrop of the central bank decisions, the Federal Reserve published the February industrial production report on Monday, confirming that US manufacturing and mining activity had been expanding heading into the conflict. Output rose 0.2 percent in February, the fourth consecutive monthly increase and the longest such streak in nearly three years. Manufacturing production rose 0.2 percent, its third gain in four months. Mining output increased 0.8 percent, after a 0.9 percent rise the prior month. Capacity utilisation across the industrial sector held steady at 76.3 percent, around two percentage points below its long-run average but meaningfully higher than the lows seen during the post-pandemic manufacturing slump.

The data provided a useful baseline: the US industrial economy entered the conflict from a position of gradual recovery, not fragility. The semiconductor and electronics subsectors had been among the leading contributors to manufacturing growth through late 2025 and early 2026, driven by ongoing AI infrastructure investment that did not depend on Middle Eastern energy supplies in the same way that freight-intensive or petrochemical industries did. Whether that sector-level insulation would persist depended on whether higher energy and transportation costs eventually crowded out capital spending elsewhere in the economy. February's data could not answer that question. It could only establish how things stood three weeks before the conflict began.

Markets: equities fell, commodities surged, and bonds moved with them

The week's market scorecard captured the structure of the shock more clearly than any single data release. Equities fell across every major geography: the S&P 500 dropped 1.87 percent on the week and was down 4.68 percent for the quarter to date. The MSCI All Country World fell 1.77 percent; MSCI EAFE, covering developed markets outside the US, dropped 2.06 percent. Real estate investment trusts declined 3.73 percent. The Bloomberg US Aggregate Bond Index fell 0.51 percent on the week and 0.68 percent for the quarter, an unusual move in the same direction as equities and one that reflected rising yields rather than credit stress.

The single category moving in the opposite direction was commodities. The Bloomberg Commodity Index was up approximately 23 percent for the quarter to date by the end of the week, with oil the dominant driver. Brent crude reached $109 per barrel at one point during the FOMC meeting on Wednesday, having risen roughly 50 percent from its level of around $72 on the eve of the conflict. That 50 percent figure, sustained over three weeks, was close to the largest percentage surge in crude oil prices over any comparable period in recorded history. The simultaneous decline in stocks, bonds and real assets alongside a surge in energy commodities was precisely the signature of a stagflationary supply shock: an environment in which traditional diversification strategies offered limited protection, and in which central banks found themselves trapped between two policy objectives pulling in opposite directions.