Daily Market Analysis: Fed Holds Rates, but Signals Growing Caution
Article published on March 21st, 2025 4:45AM UK Time
Fed Maintains Rates, Signals Balance Sheet Adjustment
As expected, the Federal Reserve kept rates unchanged at 4.25-4.5% in a unanimous decision. However, the central bank announced a slower pace of balance sheet runoff, reducing the monthly Treasury redemption cap from $25bn to $5bn, while maintaining the MBS cap at $35bn.
The decision reflects a growing cautious stance from the Fed, as uncertainty around the economic outlook has increased. One notable dissent came from Fed Governor Waller, who preferred no changes to the balance sheet runoff but agreed with maintaining current interest rates.
Key Adjustments to Fed Projections
- FFR projections remained unchanged, with rates forecasted at 3.9% in 2025 and 3.4% in 2026, aligning with market expectations.
- GDP growth projections were revised lower, with 2025 growth now seen at 1.7% (prev. 2.1%) and 2026 at 1.8% (prev. 2.0%).
- The unemployment rate forecast was raised to 4.4% for 2025 (prev. 4.3%), indicating the Fed expects some softening in the labor market.
- PCE inflation forecasts for 2025 were raised to 2.7% (prev. 2.5%), reflecting persistent price pressures.
Inflation, Tariffs, and the Fed’s Next Move
Fed Chair Jerome Powell highlighted that inflation remains uncertain, with tariffs emerging as a key driver of price pressures. He noted that:
- February PCE likely rose 2.5%, while core PCE is expected at 2.8%—both indicators showing inflation is not yet fully under control.
- Businesses have started raising prices preemptively due to uncertainty around new tariffs, adding to inflation concerns.
- While the Fed is not in a hurry to cut rates, policymakers are watching for any economic slowdown that might justify easing.
Powell’s Comments on Rate Cuts & Inflation Outlook
- Powell reiterated that inflation may be transitory, but the impact of tariffs could delay further disinflation progress this year.
- Despite weaker consumer spending and rising uncertainty, Powell emphasized that rate cuts are not imminent and policy remains restrictive.
- The costs of waiting to cut rates are seen as low, as the Fed weighs weaker growth against persistent inflation risks.
Market Implications: What to Watch
Bottom Line: The Fed remains patient but cautious, balancing slower growth with persistent inflation risks. Markets will closely watch upcoming inflation and labor market data for clues on when the first rate cut may materialize. Meanwhile, tariff risks could introduce additional volatility, making global trade dynamics an increasingly important factor for the Fed’s policy outlook.