March 1, 2025      

    Noting that “uncertainty around the economic outlook has increased,” the Federal Open Market Committee (FOMC) elected to keep its target range for the federal funds rate unchanged at 4.25% - 4.50% at their March 18-19^th meeting. The policy statement continued to characterize inflation as “somewhat elevated,” and indicated the Committee would be “attentive to the risks to both sides of its dual mandate.” The Summary of Economic Projections (SEP) revealed that their median GDP growth forecast for this year was downgraded, while the core PCE inflation forecast was pushed higher. Still, the new ‘dot plot’ showed minimal changes from the December version. The median projection continued to call for two rate cuts of 25 basis points this year and two more in 2026, suggesting that they believe growth risks will outweigh inflation risks.  

     The FOMC also announced it would slow the pace of Quantitative Tightening (QT). Beginning in April, the Fed will only allow $5 billion of Treasury securities to roll off its balance sheet, whereas it was allowing $25 billion per month mature and roll off. The Fed will re-invest most of its treasury holdings when they mature. The central bank will continue allowing up to $35 billion worth of the Agency and mortgage-backed securities roll off the balance sheet every month. The Fed is slowing the reduction of its balance sheet in order to avoid disruptions that could come about from the ongoing standoffs over the debt ceiling, which limits how much money the government can borrow to meet its financial obligations.

     An economy losing momentum has been evident in recent reports of softening retail sales and personal spending. Consumers seem to be tightening their belts, causing large national retailers to issue downbeat guidance for the year. There has also been evidence of some cooling in the labor market, notably the February U-6 underemployment rate, which includes individuals working part-time for economic reasons and those who currently want a job but are discouraged from job seeking, jumped to 8.0% from 7.5%. The more timely weekly jobless claims for unemployment benefits are also telling. The relatively low level of initial claims is consistent with a low rate of private-sector layoffs, while the expanded level of continued claims indicates that individuals looking for work are finding a sluggish hiring pace. Federal layoffs will also have a negative impact, although it may take time to filter into the data.      

     Along with the rising risk of an economic downturn the ratcheting of trade tensions has added to concerns of upward pressure on inflation. Meaningful increase in inflation expectations have been seen in both consumer and business surveys, while the high level of uncertainty surrounding fiscal, tariff and tax policies have been a contributing factor in financial market volatility. Such volatility further dampening consumer and business sentiment.


          For now, the Fed finds little option other than sitting and waiting for more clarity on both the policy and data front. As stated by Federal Reserve Chairman Jerome Powell in the last post-meeting press conference the Fed will try to separate “signal from noise” in seeking clarity. Going forward, the Fed will have to carefully weigh the risks of a slowing economy against the risks of inflation, and possible unhinging of inflation expectations as uncertainty swells around talk of trade, tariff and tax policies.