News & Insights

Fed Signals Optimism on Growth Despite Sticky Inflation Outlook 

The Federal Reserve’s March summary of economic projections revealed a surprisingly optimistic take on economic growth while acknowledging that the battle against inflation has hit a "sticky" patch. The war with Iran and elevated energy prices have forced an upward revision to inflation forecasts, though the Fed simultaneously boosted its expectations for gross domestic product, driven by a stronger long-term productivity forecast.

The Fed bumped its 2026 headline personal consumption expenditures inflation forecast from 2.4% to 2.7%, with core inflation expectations rising from 2.5% to 2.7%. Fed Chairman Jerome Powell partially attributed this to energy prices and the war while admitting that progress on inflation has not been as rapid as anticipated. Specifically, goods prices have failed to deflate as expected which the Fed attributes to tariffs. Despite these pressures, the Fed's "transitory" view persists for the medium term, with forecasts suggesting inflation will land on the 2.0% target by the end of 2028.

The Fed has also embraced the long-term productivity boom with yet another increase to its forecast for economic growth. The long-run GDP forecast increased from 1.8% to 2.0%, reflecting a structural shift in economic efficiency. The next three years were also revised, with the 2027 forecast rising by 0.3 percentage points. This is another upward revision in gains expected through 2028, adding to the change made in December. Powell noted that the strong productivity we’ve seen so far isn’t necessarily an "AI story" yet; rather, it probably stems from pandemic-era labor shortages that forced corporations to become more efficient as well as strong capital expenditure in high-benefit categories like intellectual property. However, the Fed expects AI to improve productivity growth going forward. 

The Fed’s stance on interest rates remains "wait and see." There were no changes to the 2026 rate forecast, with both the Fed and the market now coalescing around a single rate cut in December. The Fed did, however, raise its long-term neutral Fed funds rate forecast to 3.1%, the highest level since 2016. Powell’s rationale for a higher neutral rate includes inflationary pressures driven by the AI build-out, citing increased demand for electricity and data center construction. That’s a bit speculative and it is only Powell’s view, but the rise highlights a combination of the FOMC’s growing concerns around stubbornly high inflation but also their optimism for sustained GDP growth.

Federal Reserve Summary of Economic Projections, March 2026 

Source: Federal Reserve

Market-Based Expecation of Fed Funds Rate by End of 2026 and 2027

Source: Bloomberg

Healthy Consumers in an Age of Uncertainty 

Consumers entered the energy shock in a stronger position than originally thought, with household incomes for each month from mid-2025 through December revised up 0.2% to 0.3% year-over-year. January added another robust 0.4% increase. The personal savings rate was revised up as well, now reflecting a healthy level.

Household balance sheets reinforce consumers’ strong footing. Debt service is below pre-pandemic levels and wages are growing at approximately 5% annually. Delinquency rates have been stable for most borrowing categories, though student loan defaults continue to rise since the end of forbearance in 2024. While this is concerning for the small cohort of Americans with outstanding student loans, it is unlikely to be a significant drag on the overall economy.

Gas prices are up significantly since the war began in Iran, hitting discretionary income. Coincidentally, tax breaks and incentives stemming from the One Big Beautiful Bill Act are now flowing through the system to help offset the price spike. Personal taxes are down 3.2% for this reporting season and early IRS data shows that refunds are averaging 10.9% higher than last year, cushioning the surge in gas prices.

While consumers are well-positioned to absorb the current energy shock, recent data shows that sentiment is softening. However, spending behavior tends to track with income growth, which is rising, resulting in a more resilient economy.

Personal Income and Spending Month-over-Month % Change 

Source: Bloomberg

Percentage of Households Transitioning into Serious Delinquency by Category

Source: Bloomberg

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