Productivity is set to benefit US GDP growth and inflation over the forecast period. Inflation expectations are not a concern for the FOMC, in stark contrast to the RBA.
The US FOMC marked time at its March meeting, recognising increased global uncertainty since January, but also a need to remain focused on the domestic economy when determining the appropriate path for policy. GDP growth is now expected to be 2.4% in 2026 (prev. 2.3%) and, more significantly, 2.3% in 2027 (prev. 2.0%), then 2.1% in 2028 (prev. 1.9%) and 2.0% in the longer run (prev. 1.8%). This is despite a largely unchanged view for the labour market, the unemployment rate seen edging down from 4.4% at end-2026 to 4.2% by end-2028, where it is expected to remain in the longer run. Noted in the press conference is that labour supply is constrained and will likely remain so over the forecast period, keeping job gains low. The stronger path for GDP growth is therefore primarily a function of productivity gains as well as a greater willingness amongst consumers to spend out of current income and wealth.
The consequences for inflation of tariffs and the Middle East conflict are seen as temporary, annual inflation revised up 0.3ppts to 2.7% for 2026 but only edged higher to 2.2% for 2027 and unchanged at 2.0% in 2028. Capacity constraints evident in the US economy (housing and energy are prime examples) continue to get little airplay in the FOMC’s communications, so too the potential for second-round effects from energy and other commodities impacted by the conflict in the Middle East (fertiliser being an example). Inflation expectations are clearly not a concern for the FOMC, in stark contrast to the RBA’s view for Australia.
The Committee’s base case for the stance of policy therefore remains one cut in 2026 and another in 2027 to 3.1%, which is now the Committee’s best estimate of the US’ longer run neutral rate. The implication here, confirmed in the press conference, is that the Committee sees a need to maintain a moderately restrictive stance over the next year, as inflation risks recede, and then an ability to return to a neutral stance for the out years.
Risks to the above views are evolving, however. While most Committee members still expect the next rate decision to be a cut, the lower bound for the 2026 central tendency and full forecast range for the fed funds rate was edged up at this meeting. The upper bound for the 2026 and 2027 central tendency range for inflation was also increased, highlighting a greater degree of uncertainty over the persistence of price pressures in the short term.
Westpac continues to believe that the FOMC are likely to cut once more, at most, in this cycle. The lack of private sector job creation spoken about in the press conference points to the timing of this cut being sooner than later. We have this decision pencilled in for June, albeit with low conviction. The more critical point here though is that, with economic and fiscal capacity constrained as well as potential upside risks from tariffs and commodities, term US yields are likely to rise from here. Such an outturn puts the onus for growth on household consumption as housing investment remains weak and business investment concentrated in niche applications such as AI infrastructure and efficiency measures across industry.
