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Weekly Update 3/20/2026: Fed Holds Rate Steady

Insights
  • BAE Systems and Rheinmetall AG added to SGK Core
  • General Mills reports earnings
  • Producer prices rise unexpectedly

Economic data

The producer price index (PPI) rose 0.7% in February after a 0.5% gain the prior month, according to the Bureau of Labor Statistics in a Wednesday morning release. This acceleration in wholesale prices was a surprise, as many economists expected a 0.3% monthly increase, and is taking place prior to any data collection after the beginning of the war with Iran. Excluding food and energy, the so-called core gauge rose 0.5%, higher than the survey figure of 0.3% but lower than the 0.8% rise the prior month.   More than half of February’s increase was due to an advance in services costs. That included the rising costs for traveler accommodation and food wholesaling. On a year-over-year basis, headline PPI rose 3.4% while core PPI was up 3.9%, higher than the consensus figures of +3.0% and +3.7%, respectively. The bottom line is that February’s data came in hot as inflation makes its way through the supply chain toward the end consumer. Components that enter the Fed’s preferred personal consumption expenditure deflator rose in February; we will see how much when that data is released on April 9.  

New home sales in January fell to the lowest level since 2022 according to data from the Department of Housing and Urban Development. New single-family home sales declined a surprising 17.6% from December to an annualized 587,000 pace. Sales were weaker than all estimates in a Bloomberg survey of economists. Severe winter weather in much of the country is the main culprit. Sales fell almost 45% in the Northeast and about 34% in the Midwest as storms covered the regions in snow and hard-to-remove ice for weeks. The median sales price declined 6.8% in January from a year earlier to $400,500. The key question is whether prospective buyers will begin to venture out as the spring selling season approaches.  

FOMC

The Federal Open Market Committee (FOMC) meeting held its regularly scheduled gathering on Wednesday. The FOMC voted 11-1 to leave its benchmark federal funds rate in the target range of 3.50%-3.75%. Fed Governor Stephen Miran voted against the decision in favor of lowering rates by a quarter-point. Unlike at January’s meeting when he voted for a quarter-point cut, Christopher Waller decided to vote with the majority this time According to the “dot plot,” which is graphs governor expectations of the federal funds rate at various points in the future, the median official expects to lower rates by a quarter-point during 2026 and another quarter-point in 2027. Those expectations are the same as they projected in the summary of economic projections (SEP) released in December of last year. Of the 19 participants, one member penciled in a rate hike for next year.  

The median Fed official sees core inflation at 2.7% by end of 2026, up from the 2.5% forecast in December. Gross domestic product, which is the sum of all goods and services produced domestically in a certain time frame, is expected to be 2.4% this year according to the median forecast in the SEP, up from 2.3% previously. The Fed’s statement, which is analyzed to the microscopic level by the markets, stated: “Available indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, and the unemployment rate has been little changed in recent months. Inflation remains somewhat elevated.” According to the Labor Department, the economy lost 92,000 jobs in February, and the jobless rate edged higher to 4.4%. The only reference to the war with Iran was this statement: “The implications of developments in the Middle East for the U.S. economy are uncertain.” That conflict is reinforcing the arguments for those wanting to keep rates steady due to worrisome inflationary trends, but it also a catalyst for those wanting to cut because inflationary spikes can be recessionary and lead to more pressure on an already fragile labor market.  

In the post-meeting press conference, Chairman Powell said that the committee would need to see progress in reducing inflation, especially for goods, before it resumes lowering rates. “If we don’t see that progress, then we won’t see the rate cut,” he said. The Fed’s target for inflation is 2.0% but it has been years since that figure has been met. While the Supreme Court overturned across the board tariffs from the Trump administration, there are other mechanisms by which levies can be placed on goods, suggesting that beyond the war, inflation uncertainty is likely to continue. He also mentioned that though there was a vote for a hike in future years, “the vast majority of participants don’t see that as their base case.”  

Concerning political matters, last week U.S. District Chief Judge James Boasberg threw out the Department of Justice subpoenas targeting Powell, saying there was no evidence to justify them. U.S. Attorney Jeanine Pirro said the Department of Justice would appeal that ruling. Powell said he would not step down from the Fed while the case continues. Republican Senator Thom Tillis said he will not vote to confirm Trump’s chosen successor, Kevin Warsh, until that investigation is ended thus preventing the process from starting in the Senate. What happens if this is not resolved before May, when Powell’s term as chairman is over? Powell will stay on as chair “pro-tem” until a new leader is confirmed. Powell’s term as governor continues until 2028. This suggests that Powell and his influential voice could stay on the board making for awkward meetings at the water cooler. Stay tuned.

While markets sold off during and after the press conference, our take is that there was not much news. We figured the Fed would not make any changes with the war pressuring consumer pocketbooks and the labor market exhibiting an uneasy equilibrium. The next FOMC meeting is April 29 which is about six weeks away. It is anyone’s guess what the price of oil will be at that time, though the futures markets continue to price in lower prices three- and six-months out. Might the Strait of Hormuz still be a perilous crossing at that time? Nobody knows. At this point, we conclude that the Fed is unlikely to do anything until these uncertainties have a more definite conclusion.    

Portfolio Adjustments

We will be adding two new stocks in client portfolios as conditions warrant in the coming weeks. BAE Systems PLC (ticker: BAESY) is an international defense, security and aerospace company based in London, U.K. It delivers advanced products and services for air, land, sea and space forces with its biggest customer being the U.S. but also having considerable ties with the U.K. government. With many countries in Europe looking to ramp up their defense budgets, BAE is positioned for gains. Similarly, Rheinmetall AG (RNMBY) will also be a beneficiary of this increased spending. Based in Dusseldorf, Germany, the company is targeting organic revenue gains of at least 25% per year through 2030. Defense operating margin expansion should exceed over 200 basis points over that time period, based on company guidance. While the conflict in the Middle East garners headlines today, the rearmament of Europe, as well as the needs of Japan, Taiwan, Saudi Arabia and others suggest a multi-year trajectory of growth that will stretch well beyond the current conflict. We will publish in-depth research reports outlining the industry, our thesis and risks involved in these investments in the coming weeks.  

Company Events

SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.

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