The Federal Open Market Committee is widely expected to leave its federal funds rate target unchanged at 3.5 to 3.75 percent when it meets on March 17–18. While investors eagerly await lower interest rates, the leading monetary policy rules suggest holding steady is the right approach. Despite increasingly uncertain headlines, there is nothing in the current economic data to justify further easing.
The latest Monetary Rules Report from AIER’s Sound Money Project shows that the current policy rate is already slightly below the range implied by several well-known rules. Those rules point to an appropriate federal funds rate close to 4 percent. In other words, the debate heading into this meeting should not be about whether the Fed ought to cut again. It should be about what evidence would justify another cut. At present, that evidence is lacking.
Increasing Uncertainty
Holding steady may feel unsatisfying in light of recent developments.
The February jobs report was weak, with payroll employment falling by 92,000 and unemployment ticking up. At the same time, energy markets have become more volatile as the conflict with Iran has pushed oil and gasoline prices higher. The legal environment has also become less predictable after the Supreme Court ruled that the Trump administration could not rely on the International Emergency Economic Powers Act to impose tariffs. Meanwhile, President Trump has nominated Kevin Warsh to replace Jerome Powell as Fed chair when Powell’s term ends in May, adding yet another layer of uncertainty to the policy environment.
All of that uncertainty is real. But it does not justify cutting interest rates.
What the Rules Say
In uncertain times, monetary policy rules offer a useful guide. A monetary rule, like the Taylor rule and nominal GDP targeting rules, provides a disciplined way to think about the appropriate level of interest rates given inflation, employment, and spending data. They do not eliminate judgment. Rather, they help prevent policymakers from overreacting to every headline, market swing, or political development.
The Taylor rule remains the most familiar example of a monetary policy rule. It says that the Fed should set interest rates higher when inflation is above target and lower when the unemployment rate is above a level consistent with maximum employment. Using current data, the original Taylor rule recommends setting the policy rate at 4.45 percent at present, whereas a modified Taylor rule incorporates forward-looking data and interest-rate smoothing recommends 4.03 percent. Those estimates are above the Fed’s current target range of 3.5 to 3.75 percent.
Rules based on nominal GDP, or total dollar spending in the economy, point in the same direction. A nominal GDP level rule recommends setting the policy rate at 4.01 percent at present, whereas a nominal GDP growth rule recommends 3.74 percent. Nominal spending is often a cleaner way to think about the overall stance of monetary policy, especially when supply shocks—like a sudden spike in energy prices—complicate the inflation picture.
Despite their different constructions, both nominal GDP rules and Taylor rules caution against cutting rates at the March 2026 meeting. Indeed, the leading monetary rules suggest Fed officials should consider raising their federal funds rate target.
What Would Justify Further Cuts?
It’s useful to consider how the data would have to evolve for additional easing to be justified.
If unemployment stays around its current level, inflation would need to fall below the Fed’s 2 percent target for the Taylor rule to prescribe another interest rate cut. If inflation remains closer to 3 percent, the unemployment rate would have to rise by a full percentage point, to around 5.5 percent, for the Taylor rule to support an additional cut.
Nominal GDP rules would also require a large swing in the data to justify a rate cut. Nominal spending growth would need to fall by at least half a percentage point, to around 4 percent, before the nominal GDP growth rule will recommend another cut. In other words, the bar for further easing is fairly high.
Looking Ahead
The Fed has spent the past year moving its policy rate back toward the range recommended by the leading monetary policy rules. Cutting rates again without clearer evidence of lower inflation, weaker employment, or slower nominal spending would risk undoing that progress. Instead, the Fed should demonstrate patience at its March meeting.
The Fed should acknowledge the growing uncertainty around jobs, energy, and trade. But uncertainty on its own does not justify additional rate cuts. To justify additional rate cuts, the Fed would need convincing evidence that inflation has returned to target or labor markets have deteriorated considerably. The leading monetary policy rules suggest that holding steady remains the better choice for now.
