Federal Reserve Won't Cut Rates: What's the Impact on Major Asset Classes? Institutions Rush to Analyze

On the early morning of March 19 Beijing time, the highly anticipated Federal Reserve’s latest interest rate decision was announced, maintaining rates and pausing rate cuts, which aligned with market expectations.

The Fed’s interest rate forecast “dot plot” shows that the number of policymakers supporting a 25 basis point rate cut by 2026 is equal to those supporting no cut. However, the Fed also raised its inflation forecast for 2026, and Chair Powell emphasized a cautious stance in his post-meeting remarks.

The Fed’s hawkish tone led to a broad decline in overnight U.S. stocks and international gold prices, while the dollar and U.S. Treasury yields rose. Amid ongoing Middle East geopolitical tensions, how should major assets be allocated moving forward?

Hawkish Tone Drives U.S. Stocks Lower

The Fed’s March rate decision and statement reaffirmed the target range for the federal funds rate at 3.5% to 3.75%. Regarding the market’s focus on the “dot plot,” seven Fed officials support no rate cuts this year, while seven support a 25 basis point cut. In the economic outlook, the median forecast for the PCE inflation rate in 2026 was revised upward from 2.4% to 2.7%, aligning with concerns over a potential inflation rebound.

Overall, the Fed’s hawkish stance, combined with worries about sustained high oil prices, triggered a sharp decline in U.S. stocks and gold overnight, with the dollar and Treasury yields rising.

Industrial Securities noted that while there is no immediate need to worry about rate hikes, inflation driven by rising oil prices due to U.S.-Iran tensions has disrupted the previously clear path of easing this year. Looking ahead, short-term market variables will largely depend on oil price stickiness. If oil prices quickly normalize and inflation peaks subside, liquidity could further loosen this year; if high oil prices persist throughout the year, inflation may remain elevated, and concerns over tightening liquidity could persist.

Shenwan Hongyuan Securities believes that, assuming oil prices rise for 1-2 months, the Fed is likely to cut rates at most once this year. Historically, in response to supply shocks in crude oil, the Fed may initially hold steady and then adjust policy as needed. In the short term, considering stable U.S. employment prospects and relatively strong inflation pressures, maintaining inflation and inflation expectations may be the main challenge.

From the perspective of meeting economic financing needs and returns, CICC suggests that the Fed still needs 2-3 rate cuts under baseline scenarios. However, the peak and trajectory of oil prices will alter inflation paths, with $100 per barrel being a critical “watershed.” If oil prices temporarily rise to $100, rate cuts in the short term are unlikely, but there may still be room for easing in the second half of the year. If high oil prices persist into the third and fourth quarters, remaining around $100 to $110 per barrel, the probability of rate cuts in the second half diminishes significantly.

Asset Allocation Outlook

Overnight risk aversion sentiment has spilled over into the A-share market. Wind data shows that on the morning of March 19, the A-share market experienced volatility and corrections, with notable declines in resources and technology sectors such as non-ferrous metals and electronics. With ongoing Middle East geopolitical tensions, how should major assets be allocated to manage risks?

Guolian Minsheng Securities believes that liquidity issues are becoming increasingly apparent. In the short term, cautious observation is advised, waiting for clearer developments. For equities, high-valuation tech stocks may face valuation pressures, while inflation-hedging and defensive sectors like energy and utilities are more likely to attract funds.

Geopolitical conflicts have dampened risk appetite, but concerns about inflation rebound and its potential to limit Fed rate cuts have driven recent declines in international gold prices. Guolian Minsheng Securities notes that, from a medium- to long-term perspective, gold remains attractive for hedging geopolitical and inflation risks. As volatility normalizes, gold could enter a new rally.

Regarding U.S. stocks, China Merchants Securities suggests that the period from May to September, coinciding with U.S. midterm primaries, is historically prone to risk, with most volatility likely to be released in March and April. Additionally, escalating geopolitical tensions and inflation concerns similarly impact domestic markets, advising caution in domestic equity operations during March and April.

For U.S. Treasuries, CICC believes that current market expectations are somewhat overly pessimistic. As long as geopolitical tensions do not escalate to the most severe scenarios, long-term U.S. Treasuries still offer good “buy” opportunities. Unless conflicts drag into the third or fourth quarter, a rate cut by the Fed in the second half remains a possibility.