Fin-X Pulse 20th March 2025
- Brett Careedy
- Mar 20
- 4 min read
The Federal Reserve left rates on hold last night and said that it could afford to patiently wait for clearer signals. However, asset prices received a boost from the decision to slow the pace of QT from $60bn to $40bn per month, improving the liquidity outlook.
There were substantial changes to the statement issued before the meeting. The second two paragraphs now read: "The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty around the economic outlook has increased. The Committee is attentive to the risks to both sides of its dual mandate.
"In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. 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 $35 billion. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. [Emphasis added]
FOMC members lowered the 2025 GDP forecast to +1.7%, a reduction of -0.4% from the December forecasts. 2026 and 2027 are also expected to see lower growth, implying an earlier return to the long-run average of +1.8% yoy, but no recession.
PCE inflation was also raised from 2.5% to 2.7%, with an unspecified amount being attributed to tariffs.
The 2025 unemployment forecast was also raised by +0.1% to 4.4%.
Chair Powell said that the policy environment had become substantially more uncertain. Consumer spending has slowed, but labour market conditions remain "solid" and "broadly in balance".
Inflation is still above the target. The inflation effects could be transitory, and the Fed sees a rate rise as unlikely. However, it was important that inflation expectations remain well-anchored.
In this regard, the University of Michigan survey was seen as somewhat of an outlier. Other surveys and longer-term market-based measures, such as 5y5y forwards, are perceived to be more stable. However, Bloomberg shows that the current rate is still +0.43% above the Fed's 2% target and not entirely consistent with the 2% target.
The costs of waiting are perceived to be low. The official remarks included the phrase, "We do not need to be in a hurry to adjust our policy stance, and we are well-positioned to wait for greater clarity". However, it was clear that the next move was still expected to be a cut. Faced with higher inflation, the Fed envisages holding rates higher for longer, not raising.
Australian unemployment is still expected to be steady around 4.1% when released later this morning.
S&P500 5,675 +1.1%, Nasdaq Comp. 17,751 +1.4%, S&P/ASX200 future 7,936 +0.7%,
US 2yr 3.97%, -7bps, US 10yr 4.24% -4bps
US dollar (DXY) index 103.46 +0.2%, AUDUSD 0.6357 (unch), Gold US$/oz 3,048 +0.4%, Bitcoin $85,378 +4.1%
The Fin-X View
Jerome Powell adopted a reassuring tone after today's meeting.
Taking all the comments into account, the key takeaways are:
There was broad FOMC support for the approach taken and that the projections of 2025 rates have narrowed around two -0.25% cuts this year (the market is pricing three).
Growth is expected to be weaker.
The easing bias has been maintained despite higher inflation projections as the Fed sees the risk skewed towards higher unemployment.
Reserves are somewhat less abundant. Slowing balance sheet reduction (quantitative tightening, or "QT") lowers the risk of a 2019-style spike in overnight rates.
However, it was also clear that the Fed doesn't really know what will happen, particularly with respect to tariffs and their effects. There were lots of comments about waiting to learn more.
The secondary effect of slowing QT is that it lessens a headwind for asset prices in the short term, hence the market bounce. Liquidity sensitives such as gold and bitcoin also responded.
But QT is still taking place. After this brief respite, we still expect the market to begin to price a deteriorating growth outlook on the back of fiscal austerity and higher prices, with the severity dependant on how tariffs impact inflation expectations and restrict the Fed's ability to respond with lower rates.
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