"Unchanging" Changes — Interpretation of the Federal Open Market Committee (FOMC) Meeting in March 2025

Author: Ping An Shoujing Team; Source: Zhong Zhengsheng Economic Analysis

Core Viewpoints

On March 19, 2025, U.S. time, the Federal Reserve announced the FOMC meeting statement and economic forecasts, and Powell gave a speech. Subsequently, the market trading style resembled "accommodative trading": the 10-year U.S. Treasury yield fell by 8 basis points to 4.24%, the three major U.S. stock indices rose, the U.S. Dollar Index fell, and gold broke through $3050 per ounce during intraday trading.

Meeting Statement and Economic Forecast: No interest rate cut as expected, still anticipating two rate cuts within the year. The Federal Reserve maintained the policy rate range at 4.25-4.50% during the March 2025 meeting and plans to further slow down balance sheet reduction starting in April, reducing the speed of Treasury bond sales from $25 billion per month to $5 billion. Compared to the January 2025 statement, the description of the economic outlook changed from "there is uncertainty" to "uncertainty has increased," and the phrase "(two-way) risks are roughly balanced" was removed. Federal Reserve Governor Waller voted against slowing the balance sheet reduction. In terms of economic forecasts, the median GDP growth forecast for 2025 was significantly revised down from 2.1% to 1.7%, and the unemployment rate was revised up from 4.3% to 4.4%. The median forecasts for PCE and core PCE inflation rates were revised up by 0.2 and 0.3 percentage points to 2.7% and 2.8%, respectively; the policy rate for 2025 is maintained at 3.9% (with two rate cuts), and the dot plot shows a weakening expectation for rate cuts in 2025.

Powell's speech: "No change" should adapt. Powell's core idea is that policies such as tariffs bring great uncertainty to inflation and economic prospects, and the Federal Reserve intentionally or reluctantly chooses to adapt with "no change" while maintaining a high degree of flexibility in monetary policy. The key messages conveyed include: 1) It is difficult to assess the specific contribution of tariffs to inflation, but it is believed that (long-term) inflation expectations remain stable. 2) It is believed that the U.S. economy is still robust, as "hard data" such as employment and consumption are not weak, only some survey data related to expectations have weakened; although the probability of a U.S. recession has increased, it is still not high. 3) The Federal Reserve does not need to curb inflation at the cost of a recession like in the 1970s. 4) Financial markets, including the stock market, are important, but market volatility must be sufficiently sustained to be a focus of attention. These remarks have somewhat alleviated market concerns about "stagflation."

Policy Considerations: Economic and interest rate cut prospects remain to be reassessed; slowing the balance sheet reduction may be a stopgap measure. Is the Federal Reserve willing to timely support the economy and the stock market with interest rate cuts against the backdrop of rising inflation risks? It is difficult to make a judgment from this meeting. The Federal Reserve may have intended to express optimism about the U.S. economy. However, we remain cautious about Powell's belief that the "hard data" of the U.S. economy still shows resilience. We also have reasons to worry that the Federal Reserve's judgment on inflation is too optimistic: the Federal Reserve may not have fully accounted for the impact of tariffs; the risk of rising inflation expectations has not been adequately addressed. We believe that, compared to the baseline expectation of a 50 basis point rate cut for the year, a more likely deviation is that the downward pressure on the U.S. economy exceeds the Federal Reserve's current forecast, leading to the risk that the Federal Reserve's rate cuts in the first half of the year are too late, necessitating "catch-up cuts" in the second half, resulting in an actual rate cut of more than 50 basis points for the year. A positive factor is that the Federal Reserve has relatively decisively announced a slowdown in balance sheet reduction by reducing the supply in the treasury market and lowering U.S. Treasury yields. This may also be an important consideration for the Federal Reserve's temporary choice to "stay put" on interest rates.

Risk warning: The U.S. economy and employment have weakened more than expected, U.S. inflation has risen more than expected, and there is a high level of uncertainty regarding U.S. policies.

The Federal Reserve's meeting in March 2025 did not cut interest rates as expected, but announced that it would begin to further slow down the balance sheet reduction starting in April. The latest economic forecasts have downgraded growth and upgraded inflation, but the median rate forecast still anticipates two rate cuts within the year, although the dot plot indicates that expectations for rate cuts in 2025 have weakened. The core idea of Powell's speech is that policies such as tariffs bring significant uncertainty to the U.S. inflation and economic outlook, and the Federal Reserve has deliberately or reluctantly chosen to respond with "no change" while maintaining a high degree of flexibility in monetary policy. Powell's remarks somewhat alleviated market worries about U.S. "stagflation." However, we believe that compared to the baseline expectation of a 50 basis point cut for the whole year, a more likely deviation is that the downward pressure on the U.S. economy exceeds the Federal Reserve's current assessment, leading to the risk that the Federal Reserve's rate cuts are too late in the first half, necessitating "catch-up cuts" in the second half.

1. Meeting Statement and Economic Forecast: No interest rate cut as scheduled, still expecting 2 rate cuts within the year.

The statement from the Federal Reserve's monetary policy meeting in March 2025 maintains the target federal funds rate in the range of 4.25-4.50%, in line with market expectations; at the same time, the Federal Reserve plans to further slow down the balance sheet reduction starting in April, reducing the pace of Treasury bond sales from $25 billion per month to $5 billion, while not changing the pace of $35 billion in monthly reductions of MBS.

Compared to the statement in January 2025, this statement maintains the assessments of current economic activity, unemployment rate, labor market, and inflation, but the description of the economic outlook has changed from "uncertainty exists" to "uncertainty has increased." Additionally, the phrase "(two-way) risks are roughly balanced" has been removed, indicating the Federal Reserve's growing concerns about economic uncertainty. Furthermore, in this statement, one member (Federal Reserve Governor Waller) voted against the policy decision, showing support for maintaining interest rates but opposing a slowdown in balance sheet reduction, wishing to keep the current pace of decline in securities holdings.

The economic forecast (SEP) released by the Federal Reserve in March 2025 shows major changes compared to December 2024, including:

1. Economic Growth: The median forecast for economic growth in 2025 has been significantly revised down from 2.1% to 1.7% (which is slightly below the Federal Reserve's long-term economic growth level of 1.8%), and the economic growth rate for 2026-2027 has been revised down from 1.9-2.0% to 1.8%.

2. Employment: The median unemployment rate forecast for 2025 has been revised up from 4.3% to 4.4%, maintaining the unemployment rate forecast of 4.3% for 2026-2027 and a long-term level of 4.2%.

3. Inflation: The median forecasts for the 2025 PCE and core PCE inflation rates have been revised up by 0.2 and 0.3 percentage points, to 2.7% and 2.8%, respectively; both indicators for 2026 are 2.2%, and both for 2027 are 2.0%, with long-term inflation forecasts also at 2.0%.

4. Interest Rate: The median forecast for the policy interest rate in 2025 is maintained at 3.9% (with 2 rate cuts within the year), the median forecast for the policy interest rate in 2026 is maintained at 3.4%, and the long-term policy interest rate forecast is maintained at 3.0%.

5. Dot Matrix Chart: For the year 2025, among 19 officials, 4 are expected not to cut interest rates (an increase of 3 from the last estimate), 4 are expected to cut rates only once (an increase of 1), 9 are expected to cut rates twice (a decrease of 1), and only 2 are expected to cut rates three times or more (a decrease of 3). It can be seen that although the median forecast remains unchanged, the officials' overall expectations for interest rate cuts in 2025 have weakened.

2. Powell's Speech: "No Change" Should Change

Overall, the main focus of this press conference is how the Federal Reserve views the inflation outlook, the pressures of economic slowdown, and the considerations for maintaining the prediction of two rate cuts within the year. Powell's core idea is that policies such as tariffs bring significant uncertainty to the U.S. inflation and economic outlook, and the Federal Reserve has intentionally or reluctantly chosen to respond with "stability" and maintain a high degree of flexibility in monetary policy. The key messages conveyed include: 1) It is difficult to assess the specific contribution of tariffs to inflation, but long-term inflation expectations are still considered stable. 2) The U.S. economy is still seen as robust because "hard data" such as employment and consumption are not weak, only some survey data related to expectations have weakened; the probability of a U.S. recession has increased but remains low. 3) The Federal Reserve does not need to curb inflation at the expense of a recession like it did in the 1970s. 4) Financial markets, including the stock market, are important, but fluctuations in financial markets need to be sufficiently persistent to be closely monitored. These statements have somewhat alleviated market concerns about U.S. "stagflation."

After the meeting statement and Powell's speech, the market trading style was similar to "loose trading": the 10-year U.S. Treasury yield continued to decline, falling 8 basis points from around 4.32% to about 4.24%; the three major U.S. stock indices expanded their gains, with the Nasdaq, S&P 500, and Dow Jones closing up 1.41%, 1.08%, and 0.92% respectively; the U.S. dollar index fell from a high of nearly 104 to around 103.5, but still ended the day slightly up 0.2%; the current price of gold rose, breaking through $3050/ounce during the session to set a new high, closing up 1.1% for the day.

Specifically speaking:

1. About inflation. The most frequently asked topic at this press conference was inflation. Many questions inquired about how the Federal Reserve assesses the specific impact of tariffs on inflation. Powell stated that currently, it can only be said that part of the inflation comes from tariffs, but accurately assessing their contribution is quite difficult; commodity inflation significantly rose in the first two months of 2025, closely related to the implementation of tariffs, but the exact degree of impact is hard to quantify. Regarding inflation expectations, a reporter mentioned that various surveys indicate a rise in short-term inflation expectations. Would this change the Federal Reserve's assessment of inflation? Powell acknowledged that short-term inflation expectations have indeed risen, partly due to the implementation of tariffs, and that businesses, households, and market participants have all mentioned the impact of tariffs on inflation. However, he emphasized that when he says "inflation expectations are well-anchored," he mainly refers to long-term inflation expectations; currently, long-term inflation expectation indicators (such as the five-year or five-year forward breakeven inflation rate) are flat or slightly down. But he also emphasized that the Federal Reserve will closely monitor all inflation expectation data and will not ignore any signs indicating changes in long-term or medium-term inflation expectations.

2. Regarding the expectation of two interest rate cuts within the year. Many journalists questioned that since the inflation forecast has been revised upwards and inflation risks are increasing, why does the Federal Reserve still expect two interest rate cuts this year? In summary, Powell believes: 1) The slowdown in economic growth and the rise in inflation are somewhat balanced, and there are no obvious signs of recession in the overall economic situation. 2) The current economic situation is highly uncertain, "In such a highly uncertain environment, people may choose to maintain the status quo." 3) The current policy stance can cope with uncertainty, choosing to wait for clearer economic signals to ensure the timeliness and effectiveness of policy adjustments.

3. Regarding the two-way risk balance. A reporter pointed out that the phrase "the risks to employment and inflation targets are roughly balanced" has been removed from this statement. Does this change mean that the Federal Reserve is more focused on one aspect of inflation or employment? Powell stated that the Federal Reserve has moved past the stage where emphasizing risk balance is particularly necessary, which is why that sentence was removed. This does not mean that the Federal Reserve is more attentive to one aspect of inflation or employment; rather, it reflects changes in the current economic situation and high uncertainty, especially as the impact of new government policy changes (such as trade, immigration, fiscal policy, and regulation) on the economy has not yet fully materialized, making the expression of risk balance no longer applicable.

4. Regarding the economy and employment. A reporter asked whether the slowdown in economic growth would affect future spending and investment. Powell emphasized that despite the slowdown in economic growth, "hard data" (such as employment and consumer spending) remains robust, especially with the unemployment rate maintained at a low level of 4.1%, and economic growth is still in a reasonable state. A reporter asked why the hiring rate remains low when the unemployment rate is close to 4%; whether the structure of employment growth indicates weakness in private sector employment growth. Powell stated that the labor market remains strong; although the unemployment rate is close to the natural rate of unemployment, both the hiring and layoff rates are low, indicating that the labor market is in a state of low activity balance; in the past year, employment growth has indeed concentrated in areas such as educational institutions, healthcare, and government sectors, but the private sector has also performed well; from the Federal Reserve's perspective, employment is employment, and policies do not discriminate against different types of employment.

5. Regarding the risks of recession or stagflation. A reporter asked whether the current economic slowdown would increase the likelihood of a recession. Powell pointed out that the possibility of recession has always been present, typically around one in four; looking back, at any time there has been a one in four chance of a recession occurring within 12 months. Although external forecasting agencies have generally raised the likelihood of a recession, this probability remains relatively moderate and within traditional ranges. A reporter asked whether the Federal Reserve would suppress inflation at the cost of recession like in the 1970s. Powell jokingly said, "Unfortunately," the current situation is different from the 1970s, as inflation has fallen from higher levels to close to 2%, and the unemployment rate remains at 4.1%, so there is no need to replicate the response strategies of the 1970s.

6. About the stock market. A reporter asked whether the significant drop in the stock market since the last Federal Reserve meeting raises concerns that market volatility could impact the real economy. Powell pointed out that the condition of financial markets (including the stock market) is important to the Federal Reserve, as it is the main channel through which monetary policy affects the real economy. However, he emphasized that the Federal Reserve does not comment on the reasonable level of any market but focuses on changes in economic data from a macro perspective; changes in financial markets can impact economic activity, but this impact needs to be substantial, persistent, and last long enough to draw the Federal Reserve's significant attention. He noted that market sentiment data (such as consumer confidence surveys) show concerns and downside risks, but these have not yet translated into a noticeable weakness in actual economic activity.

7. Regarding the slowing of balance sheet reduction. A reporter asked why the Federal Reserve decided to slow the pace of the balance sheet reduction and whether this adjustment is related to the debt ceiling issue. Powell pointed out that the decision to slow the pace of balance sheet reduction is a technical decision; the decrease in funds in the Treasury General Account (TGA) has led to an increase in reserves, which has caused some tightening signs in the money market; the discussion on adjusting the pace of balance sheet reduction was indeed initially prompted by the flow of funds in the TGA account, but this adjustment is not solely to address the debt ceiling issue. He emphasized that this adjustment is unrelated to the stance of monetary policy and will not affect the final size of the balance sheet; slowing the pace of the balance sheet reduction helps ensure that the process of balance sheet shrinkage is smoother and closer to the expected target. Regarding the lack of adjustment in the MBS reduction pace, Powell stated that there are currently no plans to adjust the scale of MBS reduction, and the Federal Reserve will continue to gradually reduce MBS; furthermore, the Federal Reserve may continue to let MBS shrink while maintaining the overall size of the balance sheet unchanged, but it is not yet at that stage, nor has a relevant decision been made.

3. Policy Considerations: Economic and Rate Cut Outlook Still to Be Reassessed; Slowing Balance Sheet Reduction May Be a Stopgap Measure

For this meeting, the most concerning issue for the market is whether the outlook for interest rate cuts will change. On one hand, since the Federal Reserve's January interest rate meeting, there have been more signs of weakness in the U.S. economy, and the U.S. stock market (S&P 500 index) has experienced a 10% level adjustment. The market hopes that the Federal Reserve can consider cutting interest rates more timely and decisively, or at least communicate this intention to the market. On the other hand, the "New Federal Reserve News Agency" published an article on March 18 predicting that Federal Reserve officials may further lower the forecast for interest rate cuts this year, from 2 cuts in December to 1-2 cuts [1], which has also caused U.S. Treasury yields and the dollar index to rise in advance before the Federal Reserve's statement is released.

At this meeting, the dot plot indeed showed that officials slightly lowered their expectations for interest rate cuts overall, but fortunately, the median forecast remained unchanged, still predicting two rate cuts in 2025. Investors may not feel too "hawkish" in their sensibilities. However, will the Federal Reserve be willing to cut rates in a timely manner to support the economy and stock market against the backdrop of rising inflation risks? From this meeting, it is difficult to judge. One key reason is that the Federal Reserve may have intentionally expressed optimism about the economy, which naturally avoids excessive discussion about the need for rate cuts due to economic downturns. This includes the latest economic forecasts still predicting a 1.7% economic growth in 2025, with the unemployment rate slightly rising to 4.4%, essentially reflecting a state that is slightly weaker than the long-term reasonable level, which does not amount to a significant economic slowdown, let alone a "recession."

However, regarding what Powell believes, the "hard data" of the U.S. economy still shows resilience, and we remain cautious. The GDPNow model predicts as of March 18 that the U.S. first-quarter GDP annualized rate will be -1.8%, with consumption growing only by 0.4%. It is worth noting that most of the data on which this model is based is closely related to GDP accounting and consists of "hard data" (recently including retail sales, real estate, etc.). At least in the first quarter, the U.S. "hard data" may have significantly cooled down. Following this trend, there may still be room for downward revision in the forecast for annual economic growth.

We also have reason to worry that the Federal Reserve's judgment on inflation may be overly optimistic. On one hand, the Fed may not have fully accounted for the impact of tariffs, at least not reflected in the latest forecasts. The U.S. PCE and core PCE inflation rates for 2025 have only been revised upward by 0.2-0.3 percentage points. According to PIIE estimates, the combination of 10% tariffs on China and 25% on Canada and Mexico (without considering countermeasures) could raise U.S. inflation by 0.54 percentage points in 2025. Not to mention, tariffs on China have already been raised to 20%, and after April, there is a possibility of imposing tariffs on products such as automobiles, pharmaceuticals, chips, timber, and agricultural products, and the countermeasures from trade partners may further intensify inflation risks. On the other hand, the risk of rising inflation expectations has not been adequately recognized. The 1-year and 5-year inflation expectations from the Michigan survey recently reached 4.9% and 3.9%, respectively, increasing by 2.1 and 0.9 percentage points compared to December 2024. Since short-term inflation expectations also affect the behavior of residents and businesses, triggering the "self-fulfilling" effect of inflation, Chairman Powell's statement about "stabilizing inflation expectations" by only looking at "long-term inflation forecasts" may not be entirely scientific.

We believe that, compared to the baseline expectation of a 50 basis point rate cut for the entire year, a more likely deviation is that the downward pressure on the US economy exceeds the Federal Reserve's current assessment, leading to the risk that the Fed's rate cuts in the first half of the year are too late, necessitating "catch-up" cuts in the second half of the year. This could result in the actual rate cut for the entire year exceeding 50 basis points.

One positive factor is that the Federal Reserve has relatively decisively announced a slowdown in balance sheet reduction and a deceleration in the reduction of Treasury holdings. Although Powell emphasized that this decision is unrelated to the monetary policy stance in terms of policy objectives, slowing down the balance sheet reduction can positively impact the economy and the stock market by reducing the supply in the Treasury market and lowering U.S. Treasury yields, which may objectively serve a part of the function of rate cuts. This may also be an important consideration for the Federal Reserve in temporarily choosing to keep interest rates "on hold." From this perspective, it seems that the Federal Reserve may not overly pursue controlling inflation in the future while neglecting the demands of the economy and the market.

Risk warning: The U.S. economy and employment have weakened more than expected, U.S. inflation has risen more than expected, and there is higher uncertainty regarding U.S. policies.