Points | FOMC - Hold On to Your Cuts

Few changes to the Federal Reserve's policy statement and median rate projections masked an important shift. With further progress on inflation delayed and considerable outlook uncertainty, the Fed is waiting to react to whatever conditions arise from the new administration's policies in whichever manner is appropriate. Both are undetermined and achieving clarity will take time. The Fed is well-aware of downside risks to growth and upside risks to inflation but eschewed deviating from its current restrictive stance without a clearer picture of the world it will need to react to - by holding or cutting. Inflation remains the Fed's primary focus and will temper inclinations to ease, but it would be imprudent to mistake their projections for certainty or their communication "inertia" for an unwillingness to pivot. By withholding policy signaling, the Fed aims to maximize its flexibility to respond.

20 MAR 2025

EDWARD VON DER SCHMIDT

| Key Takeaways

| Statement Comparison

| Summary of Economic Projections

| Prepared Remarks

| Press Conference

| Sources

Key Takeaways

• The Federal Reserve is waiting to react to future conditions as appropriate and does not want to commit to any course of action prematurely: "We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity."

• A modestly revised statement belied a significant degree of forecast uncertainty and material adverse risks to growth and inflation. Major changes were not warranted at this time in the absence of further information on forthcoming policy and its effects on the real economy, which is still relatively healthy while inflation remains above target.

• Much like SEP forecasts eyeing up to two cuts in 2025 against downward revisions to growth and upward revisions to inflation estimates, the dearth of signaling changes reflected policymakers' "inertia" when faced with "remarkable" uncertainty that is "unusually elevated".

• The Fed does not expect to make further progress on inflation this year but is mindful of growth risks. Goods prices have supplanted housing services as the Fed's primary inflation concern, but longer-term inflation expectations are still well-anchored. Large-scale layoffs could also bring a rapid rise in unemployment, but this is not currently reflected in aggregated national data.

• The Fed is not inclined to act preemptively - Chair Powell all but ruled out a rate cut in May. The central bank is ready to move if necessary but only once it has a better idea of where the economy is heading and what will be required of monetary policy. Such clarity will take months.

• Admittedly, the Fed does not have conviction in its forecasts but will gain confidence as policy uncertainty is resolved. At present, "hard" data have yet to corroborate more troubling survey responses and other "soft" data. The Fed is watching closely whether the latter translate to the real economy and to what degree.

• Chair Powell and the Federal Reserve cannot predict the future any more than we can - they will react to what is in front of them.

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Statement Comparison

Additions:

• Uncertainty around the economic outlook has increased

• Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.

• Voting against this action was Christopher J. Waller, who supported no change for the federal funds target range but preferred to continue the current pace of decline in securities holdings.

Subtractions:

• The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.

• The economic outlook is uncertain

The deadpan statement brought few changes. Apart from removing a reference to the balance of risks (a matter of tidying) and announcing a slowing of balance sheet tapering to begin with Treasuries in April (a "technical decision" not intended to imply anything more), the FOMC did not change its present characterizations of economic activity, the labor market, or inflation. Putting it mildly, uncertainty regarding the economic outlook "has increased".

Far from indicating an unchanged assessment of prevailing conditions, however, the lack of revision appears more likely to represent a withholding of any signaling that might limit future flexibility or prematurely commit to a policy stance. As the SEP and press conference demonstrated, there was a considerable degree of "inertia" in the Fed's communications given just how unpredictable the near-term outlook has become.

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Summary of Economic Projections

In the March SEP, FOMC participants (the Board of Governors and all Bank Presidents, 12 of whom vote at a time) lowered their 2025 GDP growth estimates with the median falling 0.4pp to 1.7%; the 2026 median dropped to 1.8% (from 2.0%). Conversely, both PCE (2025: 2.7%, +0.2pp) and core PCE (2025: 2.8%, +0.3pp) were revised higher. Taken together, these projections mark an initial step toward signaling possible stagflation on the horizon. Of note, longer-run estimates and ranges were almost entirely unchanged.

The fed funds median path did not change - another 50bp of cuts were penciled in by year-end 2025 and 100bp (cumulative) by YE 2026. Easy to miss, the central tendency (which drops the three highest and lowest readings) reflected expectations of one fewer cut this year (3.875-4.375%) than in the December SEP (3.625-4.125%). Given the possibility of retreating growth and climbing inflation, Fed officials seem more inclined to guard against the latter.

While much attention will be paid to the median forecast of two additional 25bp cuts in 2025 as well as marked-down GDP and marked-up inflation, focus on these point estimates appears misguided. Of the 19 FOMC participants, 17 viewed forecast uncertainty for GDP, PCE, and core PCE as higher than typical for the last 20 years; 16 of 19 viewed unemployment similarly. These represent the highest proportions of officials viewing their projections as relatively uncertain since March 2023 - when many forecasts called for a recession.

Forecast risks were even more imbalanced. All but one official saw GDP risks weighted to the downside - a 13-member shift from December. No one saw upside risks to growth. The opposite was true for PCE and core PCE inflation: 18 of 19 officials saw risks of inflation moving higher. These were the most-skewed risk assessments going back to 2007.

The Fed is readily admitting that it has little confidence in near-term forecasts given the magnitude of uncertainty and policy risks that have yet to be fully defined, let alone resolved. Despite not knowing where we are headed, nearly everyone on the FOMC sees risks of lower growth and higher inflation. In this regard, policy stasis should not be confused with an unwillingness to act when warranted. First, the Fed needs more time to see the forest for the trees.

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Prepared Remarks

• The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions are solid, and inflation has moved closer to our 2 percent longer-run goal, though it remains somewhat elevated.

• Economic activity continued to expand at a solid pace in the fourth quarter of last year, with GDP rising at 2.3 percent. Recent indications, however, point to a moderation in consumer spending following the rapid growth seen over the second half of 2024. Surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment.

• Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance. The labor market is not a source of significant inflationary pressures.

• Some near-term measures of inflation expectations have recently moved up. We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.

• Looking ahead, the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high. As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves.

• We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity.

• In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate, based on what each participant judges to be the most likely scenario going forward—an admittedly challenging exercise at this time, in light of considerable uncertainty. The median participant projects that the appropriate level of the federal funds rate will be 3.9 percent at the end of this year and 3.4 percent at the end of next year, unchanged from December. While these individual forecasts are always subject to uncertainty, as I noted, uncertainty today is unusually elevated. And, of course, these projections are not a Committee plan or a decision.

• Policy is not on a preset course. As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly. Our current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

• At today’s meeting, we also decided to slow the pace of decline in our balance sheet. [...] While market indicators continue to suggest that the quantity of reserves remains abundant, we have seen some signs of increased tightness in money markets. [...] This action has no implications for our intended stance of monetary policy and should not affect the size of our balance sheet over the medium term.

• The Committee also continued its discussions as part of our five-year review of our monetary policy framework. At this meeting, we focused on labor market dynamics and our maximum employment goal.

• The Fed has been assigned two goals for monetary policy—maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored.

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Press Conference

Note: Chair Powell offered many important insights and clarifications that are worth considering in context. Watching this press conference or reading a full transcript will be very helpful.

Attributing inflation forecast changes to tariffs:

"You may have seen that goods inflation moved up pretty significantly in the first two months of the year. Trying to track that back to actual tariff increases given what was tariffed and what was not - very, very challenging. So some of it - the answer is clearly some of it. A good part of it is coming from tariffs."

Looking through tariff inflation:

"It can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by us - if it's transitory. And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and depend critically as well on inflation expectations being well-anchored."

Lack of change in rate forecasts:

"The fact that there wasn't much change, I think that's partly because you know you see weaker growth but higher inflation - they kind of offset. And also frankly a little bit of inertia when it comes to changing something in this highly uncertain environment [...] There's a level of inertia where you just say maybe I'll stay where I am."

Confidence in inflation expectations being well-anchored:

"The picture broadly is this. You do see increases widely in short-term inflation expectations and people who fill out surveys and answer questionnaires are pointing to tariffs about that. In the survey world, if you look a little further out, you really don't see much in the way of an increase. Longer-term inflation expectations are mostly well-anchored. [...] Then you have market-based, and it's the same pattern [...] if you look out five years or five year five-year-forward you'll see that breakevens are either flat or actually slightly down in the case of the longer term ones [...] So we look at that and we will be watching all of it very, very carefully. We do not take anything for granted. It's at the very heart of our framework - anchored inflation expectations."

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Deterioration in consumer confidence surveys:

"We do see pretty solid hard data still [...] overall it's a solid picture. The survey data - both household and businesses - show a significant rise in uncertainty and significant concerns about downside risks. [...] The relationship between the survey data and economic activity hasn't been very tight [...] but we don't know that that will be the case here. We will be watching very carefully for signs of weakness in the real data."

"Given where we are, we think our policy is in a good place to react to what comes and we think that the right thing to do is to wait here for greater clarity about what the economy is doing."

Price stability:

"So I think a world where people can make their daily economic decisions in businesses and they are not having to think about the possibility of significantly high inflation - we know inflation will bounce around - that is price stability. I think we were getting closer and closer to that, I wouldn't say we were at that. [...] I do think with the arrival of tariff inflation, further progress may be delayed. The SEP doesn't really show further downward progress on inflation this year and that's really due to the tariffs coming in. So, delayed, but if you look at our forecasts we do see ourselves getting back into the low twos by '26 and then down to two by '27. Of course highly uncertain. So I see progress having been made toward that and progress in the future. I think that progress is probably delayed for the time being."

Why two cuts in SEP:

"So those two [growth and inflation] balance each other out. [...] The other factor though, as I mentioned, is just really high uncertainty. What would you write down? It's really hard to know how this is going to work out. And again, we think our policy's in a good place. We think it's a good place where we can move in the direction where we need to. But in the meantime it's really appropriate to wait for further clarity. And of course the costs of doing that given that the economy is still solid are very low."

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Sticky hiring rates, low unemployment:

"That's a feature - has been for some time a feature of this labor market. You have pretty high participation, accounting for aging, you've got wages that are consistent with two percent inflation, assuming that we're going to keep getting relatively high productivity. We've got unemployment pretty close to its natural level. But [...] the hiring rate is quite low. But so is the lay off rate. [...] If we were to see a meaningful increase in layoffs then that would probably translate fairly quickly into unemployment [...] we've been watching that and its just not in the data. It hasn't happened. What we've had is a low-firing, low-hiring situation and it seems to be in balance now."

"We've had two very strong goods inflation readings in the last two months which is very unexpected."

Impact of new administration's policies on labor markets:

"Ultimately it's too soon to be seeing significant effects in economic data."

Transitory base case for tariff inflation:

"You could have been talking about the last time there were tariffs in which case the inflation was transitory [...] it's still the truth if there's an inflationary impulse that's going to go away on its own, it's not the right policy to tighten policy because, by the time you have your effect [...], by design you are lowering economic activity and employment. And if that's not necessary you don't want to do it. In real time, as we know, it's hard to make that judgment."

Balancing weaker growth vs. higher inflation:

"We have two goals right, we have maximum employment and price stability. And we have to balance those. And there can be situations in which they are in tension. And we actually have a provision in our consensus statement that says what we should do in that case. That's a very challenging situation for any central bank and certainly for us. And so what we say that we'll do is we'll look how far each of those two [...] measures is from its goal, and then we'll ask how long we think it might take to get back to the goal for each of them and we'll make a judgment. Because our tools work in one direction - we're either tightening or loosening. So it's a very challenging situation. Let me say we don't have that situation right now. That's not where the economy is at all. It's also not where the forecast is. I don't know any mainstream forecasts that really show significant problems like that."

"If you look at outside forecasts, forecasters have generally raised [...] their possibility of a recession somewhat. But still at relatively moderate levels. [...] if you go back two months people were saying that the likelihood of a recession was extremely low. So it has moved but it's not high."

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Waiting too long to make a move:

"For right now, the hard data are pretty solid. We are obviously aware of the soft sentiment data and the high uncertainty, and we're watching that carefully. And we think it's a good time for us to wait for further clarity before we consider adjusting our policy stance."

Whether the Fed can have a forecast it trusts:

"Yes, I think we will. It's hard to say when that will be. These decisions are going to be made, and they're going to be implemented, and then we'll know. At that point we'll know what the decisions are and we'll have to make assessments then about the implications for the economy. Those things will happen - a lot of them will happen over the course of - in coming months, certainly over the course of this year. And we'll be adapting as we go."

Separating tariff inflation signal from noise:

"In a couple months we'll know where that [goods inflation] really was from. That's another case where I think it's going to be very, very challenging to unpack the inflation that we see over the course of this year and be able to say with confidence how much of that came from [...] tariffs and how much of it didn't."

Whether SEP cuts imply threat of growth slowdown:

"So you come in and see, broadly speaking, weaker growth but higher inflation [...] which call for different responses, right?. So they cancel each other out and people just said 'Okay, I'm going to stay here'. But the second factor is - it's so highly uncertain. [...] We do understand that sentiment has fallen off pretty sharply, but economic activity has not yet. And so we're watching carefully. I would tell people the economy seems to be healthy, we understand that sentiment is quite negative at this time, and that probably has to do with turmoil at the beginning of an administration that's making big changes in areas of policy - that's probably part of it. I do think the underlying unhappiness people have about the economy though is more about the price level."

"In the SEP you'll see that there's not further progress on core inflation this year. We're kind of flatlining - going sideways. We don't ask people to write down how much of this is from tariffs and how much of this is not. Some of it is from tariffs. [...] All forecasters have tariff inflation affecting core PCE inflation, core CPI inflation this year, without exception. [...] So it's in there. I can't tell you how much of that it is."

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Balance sheet run-off:

"It was the flows in and out of the TGA that got us thinking about it. As we thought about it, we really came to the view that this was a good time to make the move that we made. [...] It's going to be slower for longer."

"By the way we still think that reserves are abundant. Although you begin to see - some of the things we look at begin to react a little bit, but we still think they are abundant."

"It has no implications at all for monetary policy, it has no implications at all for the ultimate size of the balance sheet. It isn't sending a signal in any hidden way that you can try to tease out. [...] It's a common sense kind of a thing and it had pretty broad appeal."

Inflation expectations still anchored:

"When we talk about inflation expectations being well-anchored, we're talking about longer-run inflation expectations. And they really haven't moved much, if at all. There's one reading that everyone's focusing on that is higher, but the other survey readings and the market-based readings all show relatively well-anchored inflation expectations. You would expect that expectations of inflation over the course of a year would move around because conditions change and in this case we have tariffs coming in. We don't know how big, what speed - there's so many things we don't know. But we kind of know there are going to be tariffs, and they tend to bring growth down. They tend to bring inflation up in the first instance. So I would say I'm not dismissing what we're seeing in short-term inflation expectations. We, as I mentioned, follow that very carefully. But when we say expectations are well-anchored we're really looking at longer-term - five-year and out. And there's really no story to tell five years and out either in market-based or in surveys. But we'll watch it. We're not going to miss any evidence that longer-term or medium-term inflation expectations are moving."

Tapering MBS run-off:

"There's no plan to do that. At a certain point we'll stop run-off - and we may or may not stop MBS run-off. [...] We want the MBS to roll off our balance sheet. We really strongly desire that. But we haven't made any decisions about that."

Confidence in being well-positioned to wait for clarity:

"I'm confident that we're well positioned in the sense that we're well positioned to move in the direction we'll need to move. I don't know anyone who has a lot of confidence in their forecast. The point is we are at a place where we can cut or we can hold what is clearly a restrictive stance of policy. That's well positioned. Forecasting right now - forecasting is always very very hard. In the current situation I just think uncertainty is remarkably high."

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Rate cuts in May?

"Look I think we are not going to be in any hurry to move. As I mentioned I think we're well positioned to wait for further clarity and not in any hurry."

Removing balanced risks assessment:

"Sometimes with the language it lives its useful life and then we take it off. And that was the case here. There's really not meant to be any signal here. Over the past year conveying the sense of the balance of risks was important - that they be in balance or close to being in balance. That was useful as we approached [beginning to cut]. [...] I actually would say that the more important thing now about risks [...] participants widely raised their estimate of the risks to [...] growth and our employment and inflation mandates. That's a more salient point now than whether they're in balance."

Market volatility exerting a real impact:

"Financial conditions matter to us because financial conditions are the main channel to the real economy through which our policy has its effects. [...] What matters from a Fed standpoint for the macro economy is material changes to overall financial conditions that are persistent, that last for awhile - long enough to actually affect economic activity. So that's what we're looking for. I'm not going to opine on the appropriate level for any market [...]. And I would just point you to the bigger picture again. The real economy - the hard data - are still in reasonably good shape. It's the soft data - it's the surveys that are showing significant concerns, downside risks and those kinds of things. We don't dismiss that, we're watching it carefully. But we don't want to get ahead of that. We want to focus on the hard data. If that's going to affect the hard data we should know it very quickly [...] but you don't see that yet."

Lessons from the 1970s:

"I don't see any reason to think that we are looking at a replay of the 70s or anything like that [...] I wouldnt' say we are in a situation that's remotely comparable to that."

Retaliatory Tariffs:

"Since the very beginning we've had kind of a placeholder - the staff has a placeholder of a range of possible outcomes from tariffs and from trade policy generally. And they generally assume full retaliation in those. So that's kind of baked into the numbers. [...] Ultimately they're trying to - with the placeholder - give us a broad sense of what this might look like. When we actually know the specifics we'll be able to have still uncertain but better-informed forecasts."

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Sources

• https://www.federalreserve.gov/monetarypolicy/fomc.htm

• https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

• https://www.youtube.com/@federalreserve

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