FOMC Holds Funds Rate Steady, Participants Project 50bp of 2025 Rate Cuts

– Powell: ‘Not in Any Hurry to Move,’ ‘Well Positioned to Wait For Clarity’

– SEP Retains December Dots While Forecasting More Inflation, Less GDP Growth

– Powell: Slower Pace of Balance Sheet Run-Off Has No Monetary Policy Import

By Steven K. Beckner

(MaceNews) – Faced with softer economic activity and uncertainty about the outlook but also with increased inflation expectations, the Federal Reserve took a cautious, restrained approach in charting the 2025 course for monetary policy Wednesday.

The Fed’s policymaking Federal Open Market Committee left short-term interest rates unchanged again but opened the door wider to a resumption of monetary easing at future meetings. In fact, despite speculation that the rate-setting body might lower the key federal funds rate by only 25 basis points this year, participants projected a total of 50 basis points of cuts.

But Chair Jerome Powell again said the Fed is in “no hurry” to cut rates and said it is “well-positioned to wait for further clarity” in his post-FOMC press conference.

The FOMC decided to scale back its “quantitative tightening” policy of shrinking the Fed’s balance sheet, announcing it would slow the pace at which it reduces its Treasury security holdings as of April 1. But Powell downplayed the monetary policy significance of the move.

The FOMC policy statement highlighted “increased” uncertainty about the economic outlook in the context of rapid changes in trade and other policies by the new Trump administration. The statement also deleted a previous assertion that risks to its “price stability” and “maximum employment” mandates were “roughly in balance.”

Powell reinforced the message that greater uncertainty is keeping the Fed on hold for now.

He continued to describe the economy and labor markets as “strong” or “solid,” but took note of the deterioration of consumer sentiment about the economic outlook in the context of uncertainty about the Trump administration’s trade and other policies, while also focusing on remaining Fed worries about inflation and inflation expectations.

For the second straight meeting, the FOMC left the key federal funds rate unchanged after cutting its policy rate by 100 basis points at the last three meetings of 2024. In a unanimous vote, it kept the funds rate  in a target range of 4.25% to 4.5%.

However, FOMC participants lent some encouragement to Wall Street hopes for additional rate cuts by projecting that the funds rate will end this year at a median 3.9% (a target range of 3.75-4.00%),implying two 25 basis point cuts in coming months. That is the same projection contained in the Committee’s December Summary of Economic Projections.

The FOMC participants also kept the December funds rate projections for 2026 (3.4%) and for 2027 (3.1%).

They left unchanged at 3.0% their estimate of the “longer run” or neutral funds rate.

The new funds rate “dot plot” was accompanied by major revisions to economic forecasts.

The officials now forecast that PCE inflation will end 2025 at 2.7% – compared to the 2.5% forecast in December. Core PCE inflation is expected to close out this year at 2.8, compared to 2.5% in December. PCE inflation is forecast to fall to 2.2% in 2026 and to 2.0% in 2027.????

While increasing their inflation forecast, FOMC participants cut their GDP growth forecast from 2.1% to 1.7% — a hair below their 1,8% estimate of the longer run GDP growth rate (or “potential”). The unemployment rate is forecast to rise to 4.4%, down from 4.3% in the December SEP.

As for balance sheet policy, the FOMC said it “will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.”

However, it added, “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.”

In its policy statement, the FOMC made two notable language changes. In an addition, it said, “Uncertainty around the economic outlook has increased.”

The FOMC dropped a previous assertion that “the Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.” But Powell advised reporters not to make too much of that deletion.

The FOMC did not add any new note of concern about inflation expectations, as some had speculated it might despite some unfavorable readings in that area.

After the January 28-29 FOMC meeting and in subsequent comments, Powell said the Fed need not be “in a hurry” to cut rates, given “solid” economic and labor market conditions. For instance, after the Labor Department released modestly softer but still relatively strong February job numbers, he said “the costs of being cautious are very, very low. We can wait, and we should wait.”

After Wednesday’s meeting, Powell said much the thing about not being in a hurry, but took a somewhat different tack by repeatedly emphasizing the climate of heightened uncertainty in which the Fed must operate.

For now, he said, it is appropriate for monetary policy to remain on hold, but suggested it may need to be adjusted as the impact of trade and other policies becomes more clear.

Ahead of the meeting, mixed economic data came in. Slower consumer spending spurred lower estimates of economic growth – minus 1.8% according to the the Atlanta Federal Reserve Bank’s latest GDPNow forecast. The economy is still seen near “full employment,” with the unemployment rate staying at 4.1% in February, but non-farm payroll gains rose a less than expected 151,000, and Fed officials have said they are keeping a close eye on signs of softening in the labor market.

Meanwhile, inflation has made only halting progress toward 2%. Although the consumer price index rose a slower 0.2% last month, it was still up 2.8% from a year earlier (3.1% on a “core” basis). And after producer prices came in 3.2% year over year in February, economists estimated that the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, likely accelerated to a 2.7-2.8% pace last month.

Moreover, various gauges of inflation expectations worsened. Notably, the University of Michigan’s consumer sentiment survey showed long-term inflation expectations, which Powell & Co. have been calling “well anchored” until very recently, have risen to 3.9%, highest since 1993.

Overshadowing it all and causing financial market anxieties have been uncertainties about the economic impact of Trump trade, tax, regulatory and immigration policies.

Noting that the administration is in the process of implementing significant policy changes, Powell said “it is the net effect of these policy changes that will matter for the economy and for the path of monetary policy….”

“As we parch the incoming information we are focused on separating the signal from the noise as the outlook evolves…,” he continued. “(I)n considering the extent and timing of additional adjustments to the target range for the federal fund rate, the committee will assess the outlook and assessing risks.”

“We do not need to be to be in a hurry to adjust our policy straps and we are in greater position to wait for clarity,” he added.

Asked why he and his Fed colleagues again projected two rate cuts this year despite the higher inflation forecast, Powell noted that Fed officials also lowered their growth forecast and increased slightly their unemployment forecast. He said, “those two things kind of balance each other out.”

What’s more, because of participants’ uncertainty about the economic impact of Trump policies, he said many FOMC participants found it easier to just keep their December projections.

“We are going to have to see how thing actually work out,” Powell said, “and the fact that there wasn’t much change, I think that’s partly because you see weaker growth but higher inflation. They kind of offset.”

“And also frankly (there was) a little inertia when it comes to changing something in this  highly uncertain environment,” he went on. “There’s a level of inertia where you say ‘I will just stay where I am.’”

Powell said Trump’s policies could have an adverse impact but said that for now there is an “overall solid picture,” even though surveys show “a significant rise in uncertainty and a significant rise in downside risks.”

In his view, it wouldn’t be appropriate for the FOMC to prejudge the actual impact of Trump policies and perhaps end up making a policy mistake in the process.

“We don’t dismiss” what he called “soft data” pointing to potential economic weakness, he said, adding that “we are watching it carefully.”

“But we don’t want to get ahead of that,” Powell said. “We want to focus on the hard data.  If that’s going to affect the hard data we should know it very quickly.  And of course we will understand that. But you don’t see that yet.”

Asked whether he expects a recession, Powell said that is always a possibility, but said he does not see the odds of a recession as being particularly high.

As he has before, Powell said the FOMC can move in different directions, depending on how the economy evolves.

“If the economy remains strong and inflation does not continue to move stain reply towards 2% we can maintain policy restraint for longer,” he said, but “if the labor market were to weaken unexpectedly or if inflation were to fall unexpected we can ease inflation accordingly.”

“Our current policy stand is well positioned to deal with the risks and uncertanties we are looking at in pursuing both sides of our mandate,” he added.

But, as he kept saying, at this juncture, “the right thing to do is to wait here for greater clarity about what the economy is doing.”

Asked whether the FOMC should refrain from cutting rates or even raise them, given greater infaltiion risks from tariffs, Powell replied, “if there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy, because by the time you have your effect …. you are lowering economic activity and unemployment. And if that’s not necessary you don’t want to do it.”

He conceded that, because of tariffs, “further progress (in reaching 2% inflation) may be delayed.”

Powell tended to dismiss the bad University of Michigan reading on long-term inflation expectations, calling it “an outlier.”

“I’m not dismissing what we are seeing in short-term inflation expectations,” he said. “We… follow that very carefully but when we say expectations are well anchored we are really looking at longer terms, five years and out. And there’s really no story to tell five years and out, either in market based or in surveys….”

Powell also minimized the significance of the FOMC decision to slow the pace of QT, a decision which he said had broad support among members.

“It was the TGA flows, the treasury general account flows, that got us thinking about this,” he said. “But the more we thought about it we came around to (the view that slowing the pace of Treasury securities run-off) … fits in really nicely with our  principles and our plans and the things we have done before and the thing we said we would do ….”

But he stressed, “it’s nothing to do with monetary policy; nothing to do with the size of the balance sheet.  It’s just kind of a commonsense adjustment as you get closer and closer.  Let’s slow down a little bit again.”

“And that way we will be more and more confident that we are getting where we need to get,” he continued. “You can take our time getting there.  We are shrinking the balance sheet every Monday and we think it was a good play, and … well supported.”

Powell made clear that the FOMC has no plans to slow the pace of MBS run-off.

The Fed chief also cautioned reporters against reading too much into the statement’s deletion of language about the balance of risks.

“Sometimes with language it lives its useful life, and then we take it off, and that was the case,” he explained. “It was really not meant to be any signal here.”