How are we thinking about the March FOMC meeting?
On Wednesday, the FOMC left rates unchanged while tapering the pace of quantitative tightening (QT) substantially. They also released a new ‘dot plot’ of economic forecasts showing slower growth and faster inflation, but no change to expected rate cuts (two in 2025, another two in 2026).
- The Fed lowered its growth forecast and raised its inflation outlook, both actions consistent with our Regime Change thesis. The central bank also confirmed our call for an asynchronous cycle, especially given what we believe will be a bumpy `handoff’ from government-led domestic growth towards a more global cycle led by AI capex, construction, and inventory investment recovery. This transition will likely require lower interest rates, a key reason that − despite a higher resting heart rate for inflation − we forecast two Fed cuts this year, even as core inflation sticks around three percent.
- The FOMC’s dot plot showed a meaningful downgrade to growth expectations for both 2025 and 2026, with the widest dispersion in expectations among board members since early 2023. Meanwhile, their inflation forecast was also revised upward for both 2025 and 2026 to show another two years of above mandate inflation.
- The good news for markets is that the FOMC appears more attentive to downside risks to growth versus upside risks to inflation…The Fed is forecasting a +30 basis points increase in its core inflation gauge through the end of 2025 but is sticking to its expectation for two rate cuts this year. Perhaps more importantly, the Fed opted to taper QT to just $5 billion from $25 billion starting in April, a change that we and the market had expected to come later in 2025. We take this as a helpful sign that the Fed is attuned to preserving market liquidity amid heightened equity volatility.
- …And this framework will likely hold true as tariff rates rise further after April 2nd. Chair Powell commented that households have “significant concerns about downside risks” to growth due to the ongoing trade war, but raised the possibility that the Fed may look through a ‘transitory” spike in inflation due to higher tariffs. “Transitory” remains a taboo word for the Fed after 2021-23, so we think Chair Powell’s use of it here signals some notable comfort that things are under control. Regardless, we think he will be watching inflation expectations closely for signs that tariff-driven inflation is bleeding into the broader cycle.
- No change to our forecasts. We continue to feel good about our in-house forecasts for two cuts later this year, and another two in 2026. Notably, Chair Powell emphasized that Fed policy is in “clearly restrictive” territory, indicating that he does not feel there is much that the Fed can/should do to respond to inflation from tariffs. Said differently, Chair Powell is willing to look through tariffs’ impact on inflation and work to offset tariffs’ impact on growth.
- What are we watching closely? If productivity were to fall off, it would put more pressure on the Fed to cut rates and would likely put more pressure on Equities. We remain focused on this metric, particularly the 1Q25 print (due at the end of April).
