Overview
What happened?
The Federal Reserve, as expected, kept dollar interest rates steady at 4.25-4.50 per cent in March, holding fire for the second month running as the committee grapples with an increasingly complex and uncertain economic outlook.
The US central bank did slow the pace of quantitative tightening (QT) - a move signalled as a technical adjustment rather than a shift in policy intention. The Summary of Economic Projections, released alongside this meeting, saw the committee upgrade its inflation forecast for 2025, and lower its growth estimate, giving a clear stagflationary bent to the latest projections.
Chair Jerome Powell acknowledged tariffs as a source of inflation, but emphasised the likely transitory nature of them, giving echoes of the 2021-22 inflation missteps. Overall, Powell’s messaging was one of patience, signalling a willingness to wait until greater clarity emerges from the array of tariff, immigration, fiscal, and regulatory policy changes currently under way.
Our interpretation
Market reaction to the Federal Open Market Committee’s (FOMC) economic projections and Powell’s press conference was notably dovish. Rate futures ended the event implying 65 basis points of cuts for 2025, up from 56 basis points before the meeting. Contrary to this, we thought Powell’s tone was measured and cautious, more closely reflecting the hawkish shift in the distribution of the committee’s dot plot chart of future rate expectations and the growing uncertainty in the outlook. Powell emphasised that the FOMC's base case is that the inflationary impact of tariffs would be "transitory" but noted that this would depend heavily on inflation expectations, which are now key to watch.
The most dovish aspect of Powell’s press conference was his assertion that the inflationary impact of tariffs would be temporary. However, he sounded constructive on economic activity data and was somewhat concerned about progress in key inflation categories, noting that tariffs could delay further progress. Powell reiterated the committee’s stance of waiting for greater clarity, suggesting that the right approach is to hold steady for now.
The dot plot showed a more cautious distribution of rate expectations, with 8 of 19 members seeing either no cuts or just one reduction this year, compared to 4 in December. Despite the market’s dovish interpretation, there remains a high bar for rate cuts this year. Powell’s comments reinforced the view that the committee is in no rush to cut rates, and we continue to expect the Fed to stay on hold this year unless growth weakens substantially more.
QT tapering was another dovish surprise, even if Powell argued that it had "nothing to do with monetary policy". By cutting Treasury runoff by $25 billion per month to $5 billion starting in April, the Fed opted for a slower but likely longer runoff, a move perceived as a common-sense adjustment rather than an indication of concern over reserve levels.
Our outlook
Overall, Powell emphasised the difficult environment the committee faces given the shifts in government policy, mentioning “uncertainty” numerous times during the press conference. This is reflected in record levels of forecast uncertainty in the Fed’s Summary of Economic Projections: the diffusion indexes of participants' uncertainty assessments are high and indicate larger than normal downside risks to growth and upside risks to core PCE inflation. Despite these challenges, Powell maintained that the economy is still solid, with the labour market in balance, and that the Fed's policy is well positioned to react as needed.
In conclusion, while the dot plot still indicates two rate cuts, the distribution has shifted towards a more hawkish stance, suggesting a higher bar for monetary policy easing this year. The Fed's cautious approach amid tariff-driven inflation and policy uncertainties reinforces our view that they will maintain current policy settings through 2025, prioritising policy stability over premature adjustments. As Powell succinctly put it, "the right thing to do is to wait here for greater clarity".
