As sentiment does not always translate to activity, we will continue to monitor both economic data and the valuable input from companies as we consider our own expectations for the economy and markets for the balance of 2025
As expected, the Federal Open Market Committee (“FOMC”) maintained the fed funds target rate at a range of 4.25% to 4.50%. In a more accommodative move, the Fed announced that it intends to slow the pace of the balance sheet runoff, a form of quantitative tightening. Beginning in April, the Fed will reduce the monthly redemption cap on Treasuries to $5 billion from $25 billion while maintaining the $35 billion cap for agency debt and agency mortgage-backed securities. The lone dissent to the Fed decision came from Christopher Waller, who agreed with the decision to maintain the fed funds rate but preferred to maintain the current level of Treasury redemptions.
More importantly, the Fed also released its quarterly update of economic projections. The Fed is now projecting that the US economy will grow by +1.7% in 2025 and +1.8% in 2026, versus 2.1% and 2.0%, respectively, in December’s projections. In addition, the Fed is expecting that further downward progress in inflation may be stunted by tariffs this year, with core PCE closing this year at 2.8% and 2.2% next year. This compares with December’s 2.5% and 2.2%, respectively, and implies that tariff inflation is likely to be more transitory in nature.
The tone of the statement coupled with the changes in projections implies that the Fed remains concerned about renewed upward pressure on inflation. In addition to reiterating its commitment to “maximum employment and returning inflation to its 2 percent objective,” the statement acknowledged that the Fed would incorporate a “wide range of information” in assessing its monetary policy stance, including “financial and international developments.”
Offsetting the focus on inflation, however, was the move to reduce the balance sheet as well as the concession that “uncertainty around the economic outlook has increased” and that the Fed would be ready to make further adjustments should the risk to its mandate increase. Interestingly, there was only a very modest change to unemployment expectations. The Fed does not see unemployment ticking meaningfully higher to 4.4% in 2024; that is based on what Fed Chairman Jerome Powell described as “low hiring, low firing” labor market and supports the Fed’s view that wage inflation remains on a downward trend.
The FOMC translated these expectations into a slightly more hawkish dot plot. Specifically, while the dot plot is still showing two cuts in the fed funds rate for 2025, there were eight participants predicting one or no cuts this year and only two expecting three cuts. In a nod to the theory outlined that recent overhangs on inflation and growth forecasts are perhaps transitory, there were no meaningful changes in the projections for 2026 and 2027 and the projected terminal or neutral rate sits at 3.1%.
U.S. equities closed meaningfully higher, and Treasury bond yields were slightly lower following the release and the press conference. Expectations were met as it relates to the maintenance of a two rate cut expectation for this year and the confirmation of a slowdown in the balance sheet runoff confirmed comments nestled within the January meeting minutes. Perhaps most importantly, Fed Chair Powell provided a welcome injection of stability for investors as he stated that the likelihood of a recession “has moved up, but it’s not high” and pointed to hard data as rationale for that view. While we acknowledge that uncertainty is likely to remain high, it bears worth reinforcing that sentiment does not always translate to activity and, therefore, we will continue to monitor both economic data and the valuable input from companies as we consider our own expectations for the economy and markets for the balance of 2025.
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