We expect the FOMC to leave rates unchanged at their March meeting. Communications are likely to emphasize optionality, with risks increasing to both the inflation and employment mandates. Inflation data have surprised on the upside, and forward-looking signs of price pressures are emerging. Growth and labor data have been more mixed, but sharp weakness in the most recent employment report and some weakness in credit markets will likely keep officials focused on downside risks. We can expect the DOTS to remain more or less the same but long term rate projection can move a tad higher. Core PCE and PCE projections for CY26 might also move higher by 0.1 & 0.3 bps. In our view, a majority of officials remain comfortable with the current guidance, but there is a risk that Powell will begin to reflect some of the hawkish pushback in his post-meeting press conference. Market is currently pricing in only 23 bps of cut till Dec’26 which is different from our expectations of 2 cuts of 25 bps each in REMCY26. Hence, we recommend putting on 2*10 US SOFR steepeners at current levels of 25 for profit target of 40 with stop loss at 15. This also matches with the view that US fiscal issues might come to forefront as tariff revenues evaporate & war expenditures drive fiscal higher.
