Market Views from the Global Fixed Income, Currency & Commodities (GFICC) group
The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range unchanged at 4.25% – 4.50%. There was one dissent from Governor Waller who disagreed with changes to the balance sheet.
Changes to the FOMC Statement:
- The economic assessment was unchanged, but the statement had an added acknowledgement of increased uncertainty that replaced a statement that the risks to their employment and inflation goals are “roughly in balance”.
- The Committee announced that it would be slowing the rundown of the balance sheet starting April 1st by reducing the monthly redemption cap from $25 billion to $5 billion for Treasury securities. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion.
Summary of Economic Projections:
- Investors received FOMC participants’ revised outlooks for employment, growth, and inflation. Modest shifts higher in inflation in 2025 were offset by lower growth expectations and slightly higher unemployment.
- The Core PCE inflation forecast was revised higher to 2.7% in 2025 but kept unchanged in 2026 and 2027. The number of participants who saw upside risks to their inflation forecast rose to 18 out of 19 members.
- The Committee’s growth forecasts were revised lower to 1.7% in 2025 and 1.8% in 2026. The number of participants who saw downside risks to their growth forecast rose to 18 out of the 19 members.
- The unemployment rate forecast was increased to 4.4% in 2025 but was unchanged at 4.3% in 2026 and 2027. Seventeen out of 19 members saw upside risks to their unemployment forecast.
- Despite noticeable shifts in growth and inflation expectations, the median expectation for the path of the Fed Funds rate was little changed.
- The median member expects 50bps of cuts in 2025, 50bps of cuts in 2026 and 25bps of cuts in 2027 which would put the policy rate at 3.125% by year-end 2027. The long run dot was also unchanged at 3%.
Key Quotes from Chair’s Press Conference:
- Current and expected policy stance:
- I think we are not going to be in any hurry to move. As I mentioned I think we are well positioned to wait for further clarity. Not in any hurry.
- Our current policy stand is well positioned to deal with the risks and uncertainties we are looking at in pursuing both sides of our mandate. As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum employment and price stability goals. If the economy remains strong and inflation does not continue to move sustainably towards 2%, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or if inflation were to fall unexpectedly, we can ease rates accordingly.
- Inflation, Inflation Expectations, and the Impact from Tariffs:
- It is going to be very difficult to have a precise assessment of how much of inflation is coming from tariff. You may have seen that goods inflation moved up pretty significantly in the first two months of the year…we will be working and so will other forecasters to try to find the best possible way to separate nontariff inflation from tariff inflation…As I mentioned, it can be the case that it's appropriate sometimes to look through inflation if it's going to go away quickly without action by us. If it's transitory. And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and it could depend critically as well on inflation expectations being well anchored.
- Some near-term measures of inflation expectations have recently moved up. We see this in both market and survey-based measures and survey respond ins both consumers and businesses are mentioning tariffs as a driving factor. Beyond the next year or, so however, most pressures of longer-term expectations remain consistent with our 2% inflation goal.
- Fiscal Policy, Growth Risks and Uncertainty:
- The new administration is in the process of implementing significant policy changes in four distinct areas, trade, immigration, fiscal policy and immigration. It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects around the economic outlook is high.
- I would tell people the economy seems to be healthy. We understand that sentiment is quite negative at this time. And that probably has to do with turmoil at the beginning of an administration. I do think the underlying unhappiness people have the about economy, though, is more about the price level.
- There is always an unconditional possibility of recession. It might be broadly in the range of 1 and 4 at any time if you look back through the years. If you look at outside forecasts. Forecasters have generally raised their possibility of a recession somewhat. But still at relatively moderate levels. Still in the region of the traditional. Because they were extremely low. If you go back two months people were saying that the likelihood of a recession was extremely low. So, it has moved but it's not high.
- Balance Sheet:
- At today's meeting we also decided to slow the pace of decline in our balance sheet. Since we began balance sheet runoff our security holdings have declined by more than $2 trillion. And while market indicators continue to suggest that the quantity of reserves is abundant, we have seen signs of increased tightens in money markets. Beginning in April, the treasury redemptions will be lowered from 25 billion to 5 billion. Consistent with the committee's intention to hold primarily securities in the long run we are leaving the cap on Agency MBS securities unchanged.
- It has no implication at all for monetary policy. It has no implications at all for the ultimate size of the balance sheet. It isn't sending a signal in any hidden way that you can try to tease out.
Our View:
- The Federal Reserve (Fed) cut 100bps over the last three FOMC meetings in 2024. Since the reset lower, the Fed still judges the current policy stance as restrictive and has retained an easing bias. We expect the Fed will continue to hold its easing bias but may only deliver one additional rate cut in the first half of the year due to uncertainty.
- In the absence of clear labor market weakness, the Fed is likely to remain on hold to assess the path for inflation, especially considering newly implemented and expected tariffs upcoming on and after April 2nd. In the near term, the Fed will monitor both survey-based and market-based measures of inflation expectations and take a wholistic approach with greater emphasis on market-based inflation expectations beyond the next 12 months which we believe signal that expectations are still well anchored. As long as expectations remain well anchored, we believe the Fed will be able to respond with more aggressive rate cuts in the event that the labor market falters even with inflation still above target.
- Upside risks to US economy has diminished due to greater policy uncertainty and lower business and consumer sentiment but soft landing remains the base case. In this environment, we expect the trading range for the 10-year US Treasury (UST) yield to be 3.75% - 4.50%. As consumer and business sentiment has softened, the market has reduced the probability of a re-acceleration of growth. A central bank that retains an easing bias along with a better-balanced labor market and continued moderation in wages should limit the magnitude in which yields can rise.