(Yicai) March 24 -- The US Federal Reserve faces a dilemma between inflation risks and a weakening labor market, with two interest rate cuts possible this year if the jump in oil prices does not last long, according to the chief economist at credit ratings agency Fitch Ratings.

“The Fed is going to have to wait and see to some extent how this pans out,” Brian Coulton said in an interview with Yicai after the latest Federal Open Market Committee meeting on March 18. “The Fed will probably remain on hold at the next meeting.

“A lot depends on the duration of the oil price shock,” Coulton pointed out. If it proves relatively short-lived, concerns about the labor market are likely to return to the front and center of the Fed’s rate-setting debate, he said.

The next scheduled meeting of the FOMC, which sets US monetary policy, will be on April 28 to 29. At its last meeting, the FOMC maintained the target range for the federal funds rate at 3.50 to 3.75 percent.

Excerpts from the interview with Coulton are below:

Yicai: What's the major takeaway from the latest FOMC meeting?

Brian Coulton: You know clearly the Fed is going to have to wait and see to some extent how this pans out. A lot depends on the duration of the oil price shock as to how significant the inflation impact is going to be on the US. At the same time, if you're thinking about the domestic news we've had on the US economy, the labor market numbers have really been quite weak recently.

So those two things kind of go in opposite directions. That means the Fed will probably remain on hold at the next meeting. But beyond that, a lot depends on the duration of the oil price shock.

Yicai: The latest Summary of Economic Projections shows that participants are quite comfortable with the US broader economic growth, as the estimate was raised to 2.4 percent for 2026 and 2.3 percent for 2027. Does this suggest the Fed is viewing the Middle East conflict as a transitory or short-term event?

Coulton: That would probably be a consistent interpretation. Because if they were really expecting the oil price to be above USD100 for months and months and months, I'm sure they would have marked down their growth forecast, because that would definitely be growth negative in the US, because you have significantly bigger inflation shock, you have a squeeze on real wages, and you have a big hit to confidence.

So those growth projections don't really seem to factor that in.

They did push up inflation, but that's partly because some of the recent outturns, personal consumption expenditures inflation has been a little bit higher than expected. It wasn't a huge revision, but it probably had quite a bit to do with just the recent data rather than necessarily a view of how long this surge in oil prices is going to last.

Yicai: The market has spent the last several quarters obsessing over the jobs and non-farm payroll prints as the major barometer for the Fed's next move. But all the focus, at least in this conference, is on geopolitical risk and oil prices, with inflation back on the table again, while Brent Crude hovers around USD100. How will this disturb the US economy?

Coulton: Well, it really depends on how long this is. We published our latest global economic outlook last week. We can't predict the course of the conflict, but we had to make some assumptions.

The assumption that we made was that the oil market crisis would be relatively short-lived, so that we'll see very high oil prices through the rest of March, averaging USD100 for the month. They haven't quite averaged that so far through this month. Obviously, they've gone up in the last 24 hours to above USD100, but still within that assumption of an average of USD100 for March.

We then assumed that we would see some reopening of the Strait of Hormuz after about a month of effective closure. And that would lead to oil prices then falling relatively quickly, so that by the middle of the second half of 2026, we'll see oil prices back in the mid-USD60.

On that profile and on those assumptions, we are looking at an annual average oil price for Brent of USD70 for 2026. That compares to the assumption we were making back in December, our previous forecast was USD63, it's an important change, but it's not really so big that it's going to move the dial very much.

If that assumption proves to be right, it's not going to shift the fundamental dynamics of the US economy in the near term. And then we will go back to this trade-off between the Fed looking at the inflation is still a little bit higher than they would like it to be, but not much.

It's been coming down, and certainly, core consumer price index inflation has really been coming down quite sharply, but PCE is a little bit higher than where they would like it to be. So that would argue for maybe keeping rates above neutral for a bit longer, and yet on the other hand, the labor market really looks quite weak.

So if you look at the last three months of payroll data, you know we had some temporary impacts on the February number. It was a very bad number of February, minus 92,000. We know that it is partly affected by strikes.

But even if you adjust for the strikes and you take the three-month average, we're talking about 18,000 a month. That's really, really low. So our view is that, provided the oil price shock is relatively short-lived, those labor market concerns will come back to the front and center for the Fed debate. And there may be another two cuts this year.

Editors: Dou Shicong, Martin Kadiev