US Federal Reserve keeps rates steady and notes uncertainty from Iran. FOMC continues to signal one rate cut this year. Oil prices gained after an Iranian gas field was hit weighing on risk-sensitive assets

Global equity indices declined and oil prices jumped after explosions in the world's largest gas field ahead of the Federal Reserve’s interest-rate decision. Brent crude prices increased to $110 a barrel, reversing an earlier decline, after Israel struck Iran’s South Pars gas field, which Tehran shares with Qatar. Treasury yields increased as producer prices accelerated and the US dollar gained set against the weak risk backdrop with NZD dipping below 0.5820 before recovering. The CAD was little changed after the Bank of Canada kept rates steady with oil sensitive currencies outperforming.

Oil and European natural gas jumped as traders priced a fresh escalation risk in the Iran war after Tehran said Gulf energy assets could be targeted in retaliation for a US and Israeli strike on the South Pars gas field and related facilities. The moves in energy markets reflect fears of broader regional supply disruptions and a slower return to normal flows even once the Strait of Hormuz reopens.

The FOMC left rates unchanged at 3.75% which was unanimously expected by economists and fully discounted by market pricing. It was not a consensus decision. As in January, Governor Miran dissented in favour of a 25bp cut. However, Governor Waller who advocated for a cut in January voted with the majority to leave rates unchanged. The statement was little changed from January but acknowledged the uncertain impact for the US economy from the Iran war. The FOMC noted the unemployment rate has been little changed in recent months and that inflation remains somewhat elevated.

The dot plot shows the median FOMC participant expects to cut rates by a 25bp this year, unchanged from January. The median dot projects a further 25bp of easing in 2027, aligning with analysts’ estimates. The updated Summary of Economic Projections show policy makers have slightly increased growth and inflation forecasts. The US economy is expected to grow 2.4% this year compared with a 2.3% forecast at the December FOMC. Core PCE inflation projections increased to 2.7% from 2.5%.

In the accompanying press conference, Fed Chair Powell said the Fed sees the current policy stance as appropriate. He noted that although near term inflation expectations have risen, longer-term inflation expectations remain consistent with the central bank’s goal. He said that previous rate cuts should help stabilise the labour market. Powell also noted it is too soon to know the full economic impact from the Middle East and higher energy prices.

There was limited immediate impact on markets following the Fed’s rate decision. Market pricing continues to imply close to 25bp of easing this year. Treasury yields retraced from the session highs though this corresponded with a pullback in oil prices. 10-year notes settled around 4.22%. The US dollar maintained its earlier gains against G10 currencies although absolute moves were not large. US equities remained lower with the S&P down close to 0.5% in afternoon trading.

US producer prices surprised to the upside in February, with core PPI rising 0.5% m/m (3.9% y/y). The stronger print points to a ~0.4% lift in the core PCE deflator for the month. Meanwhile, the Iran conflict-driven oil-price surge adds near-term upside risk to inflation, though energy prices are unlikely to remain at these elevated levels indefinitely.

The Bank of Canada held its policy rate at 2.25%, signalling it’s prepared to look through any near-term oil-driven inflation but won’t hesitate to respond if energy costs start feeding into broader, persistent price pressures. Governor Macklem said spare capacity should help contain second-round effects for now, while warning growth risks are skewed to the downside. The central bank noted it is still too early to quantify the impact from the Iran conflict ahead of updated quarterly forecasts next month.

There was a decent rally for NZ fixed income in the local session yesterday reflecting the improved tone in offshore markets. 2-year swap rates closed at 3.27%, 5bp lower on the day and 12bp below recent 3.39% peak. Market pricing implies around 50bp of tightening by the RBNZ this year, down from 60bp earlier in the week. 10-year swap rates declined 6bp to 4.24% marginally underperforming relative to the government curve. NZ Debt Management will auction May-31 ($250m), Apr-33 ($150m) and May-41 ($50m) lines today alongside a small parcel of Sep-35 linkers.

NZ December quarter GDP is released this morning. We forecast a 0.3% expansion which is below the RBNZ’s 0.5% projection from February. In Australia, labour market data is expected to show the unemployment rate remained at 4.1% which will do little to ease the RBA’s concerns around labour market tightness. The Bank of Japan, European Central Bank and Bank of England are all expected to leave rates unchanged. Markets will focus on how central banks factor geopolitics into the policy outlook.

Stuart Ritson is a Markets Strategist at BNZ Markets.