Originally published March 19, 2025
The Fed left interest rates unchanged today as widely anticipated, noting uncertainty around the economic outlook has increased. The central bank made a technical move on the balance sheet, reducing the pace of permitted runoff in its Treasury holdings from $25 to $5 billion per month. The move—following a $2 trillion decline in the size of the Fed’s balance sheet from April 2022—was designed to ward off a repeat of the crisis in short-term funding markets from 2019.
Stagflation Lite
The changes to the Fed’s economic outlook were stagflation-lite. Expected growth in 2025 was revised down from 2.1% to 1.7%—not a recession but weaker. And core PCE inflation was revised up from 2.5% to 2.8%. The dot plot forecasts for the federal funds rate moved up slightly in a hawkish direction but not by enough to jostle the median expectation for two rate cuts this year—matching our own baseline scenario for reductions in both June and December.
Transitory tariff inflation?
Our focal point for today’s FOMC meeting was how Chair Powell and company were thinking about the intersection of trade policy and monetary policy. Powell gave the textbook answer, saying the central bank could look through tariff-driven inflation if long-term inflation expectations remain well anchored.
Markets seemed to take Powell’s notion of “transitory” tariff-driven inflation as a dovish outcome. We weren’t particularly surprised by the tenor of that discussion or of today’s press conference as a whole, but Fed pricing moved down slightly (chart) and U.S. equities rebounded, with the S&P 500 trading almost 1.75% higher at noon Pacific time.
Market projections for short-term rates tick lower after Fed meeting
The bottom line
The U.S. economic outlook is highly uncertain with policy whiplash jostling a solid macro foundation. We’re looking for more clarity on the path forward for trade policy on April 2.
Right now, we are seeing some risk aversion in the stock market. However, the decline hasn’t been significant enough for us to say we’ve reached an unsustainable extreme of panic—a threshold that could warrant a more material change in our dynamic positioning.
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