FOMC meeting, March 18-19

Meeting preview

Strike a pause

• The Federal Reserve will hold the federal funds rate unchanged at 4.25%-4.50% at next week’s Federal Open Market Committee (FOMC) meeting. Recent Fed commentary has reinforced a wait-and-see approach, with officials signaling little urgency to adjust policy as they assess the economic impact of recent policy shifts. Federal Reserve Chair Jerome Powell summed it up best last week saying, “We do not need to be in a hurry and are well positioned to wait for greater clarity.” 
  
  
• The policy statement may not be changed at all. Indeed, the FOMC may simply reaffirm that inflation remains “somewhat elevated,” with labor market conditions seen as “solid” and the unemployment rate having “stabilized at a low level.” The Committee will reiterate that “risks to achieving its employment and inflation goals are roughly in balance,” especially given the uncertain economic outlook.
  
  
• We anticipate the dot plot of median rate expectations will remain unchanged in 2025, with two 25 basis points (bps) rate cuts expected by year end. We foresee the dot plot still showing a further 50bps of policy easing to 3.4% in 2026 and another rate cut to 3.1 % in 2027. Policymakers’ median estimate of the long-term neutral rate will likely remain unchanged at 3%.
  
  
• The Summary of Economic Projections (SEP) will likely reflect lower median GDP growth expectations around 2% year over year (y/y) in Q4 2025 (versus 2.1% in the December projections) on account of expectations of a slower Q1 reading. The 2026 growth projection won’t be changed much, but it may tilt slightly lower. The unemployment rate trajectory won’t be changed much either, but there is a slight possibility of a 0.1 percentage point (ppt) upward revision to 4.4% in Q4 2025. The core personal consumption expenditures (PCE) inflation projection will likely remain at 2.5% y/y in Q4 2025 while the 2026 and 2027 projections may be revised 0.1pt higher to 2.3% y/y and 2.1% y/y, respectively.
  
  
• During the press conference, Fed Chair Powell will have to tap dance around policy uncertainty and its cousin, market volatility. With private sector activity slowing under the weight of heightened policy uncertainty, stocks experiencing a notable pullback and real GDP growth likely to stall in Q1 on weaker consumer spending and a surge in imports to front-run tariffs, Powell may find it difficult to reaffirm that the economy is “holding up just fine,” and that it “doesn’t need us to do anything.” 
  
  
• The Fed’s reaction function will likely be a key area of focus. How would the Fed address a potential conflict between the employment and price stability goals? How important are anchored inflation expectations in addressing such a potential conflict between the Fed’s two mandates? Would the Fed be willing to ease policy to buffer an economic slowdown at the risk of allowing inflation to reignite? Would it be willing to act pre-emptively to stave off a rise in inflation expectations at the risk of exacerbating an economic slowdown? What factors could lead policymakers to seriously consider a rate hike? 
  
  
• With Fed officials split on inflation risks, we’ll be particularly attentive to Powell’s responses to these questions. Indeed, some policymakers have expressed concern over the rise in inflation expectations while others have argued that as long as inflation expectations remain well-anchored, the Fed has room to absorb short-term price fluctuations without overreacting. 
  
  
• For now, we continue to anticipate two 25bps rate cuts in June and December. But we shouldn’t get lulled into a false sense of Fed policy stability. A reactionary monetary policy stance means policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish with hotter inflation readings.