Oil Shock Could Delay Fed Rate Cuts, TD Securities Says

Key Moments

Revised Policy Path: No Cuts Until September

TD Securities’ US macro strategy team, including Oscar Munoz and Eli Nir, now expects the Federal Open Market Committee (FOMC) to leave the target range for the federal funds rate unchanged at 3.50-3.75% at the March meeting and to maintain that stance through the third quarter of 2026.

The team has adjusted its policy outlook in light of recent developments in Iran and movements in energy markets, which they see as heightening inflation risks and delaying the timing for further easing.

Inflation Dynamics and PCE Projections

The TD Securities team expects the Federal Reserve to raise its projections for PCE inflation in its upcoming forecast. They also foresee two dovish dissents at the policy meeting, reflecting differing views within the Committee on the appropriate stance in the face of the Iran-driven oil shock.

The shift in the call on rate cuts is rooted in both the latest energy market developments and realized inflation data through February. According to the team, these factors have reduced the likelihood that the Fed can judge inflation progress as adequate by the June meeting, which had previously underpinned their expectation for earlier easing.

Despite the extended pause, the analysts continue to see conditions aligning for policy easing later in the year. On a quarterly AR basis, they project core PCE inflation to move close to 2% by the end of the third quarter. They indicate that a series of month-over-month core PCE readings averaging around 0.2% would provide sufficient confirmation for the Fed to continue normalizing rates toward a neutral level.

Powell’s Message and Risk Management

TD Securities anticipates that Chair Jerome Powell will adopt a cautious and flexible tone at his press conference, given the additional uncertainty for the economic outlook stemming from the Iran conflict.

The team writes:

“We expect Chair Powell to maintain optionality in his press conference with the Iran conflict creating further uncertainty around the economic outlook. He will likely highlight that the current policy stance is well-positioned to respond to dual-sided risks from the conflict but that it is too soon to react.”

They also state:

“We do not expect any changes to the median dots across the forecast horizon.”

Strategists’ Commentary on the Extended Pause

Summarizing their revised call, the TD Securities US macro team notes:

“We are revising our Fed call and do not expect another rate cut until September as the Fed assesses the recent developments in Iran and waits for further inflation normalization. The policy rate will remain at 3.50-3.75% at the March meeting.”

They further explain their view on the timing of policy adjustments:

“We now look for the Fed to stay on hold through the end of Q3 after recent developments in energy markets and actual inflation data through February. In our view, the current oil market situation makes achieving sufficient progress in the inflation profile nonviable by the June meeting — which was our original argument for easing.”

On the expected inflation path and conditions for resuming cuts, they add:

“Still, we expect inflation conditions to support Fed easing by September. On a quarterly AR basis, we project core PCE inflation to edge close to 2% by the end of the third quarter. In our view, a string of m/ m core PCE increases averaging close to 0.2% would be sufficient evidence for the Fed to resume normalization toward neutral.”