FOMC meeting, March 18-19

Meeting minutes

Minutes from another world show the Fed favoring a reactionary wait-and-see approach

• The minutes of the March Federal Open Market Committee (FOMC or Committee) meeting noted that all participants favored holding the fed funds rate unchanged at 4.25%–4.50%. The minutes confirmed the Fed’s wait-and-see approach, with officials signaling little urgency to adjust policy amid elevated uncertainty around the economic outlook and trade policy. 
  
  
•  Emphasizing that uncertainty, most participants noted the potential for inflationary effects arising from various factors (including tariffs) to be more persistent than they projected. And, with monetary policy restrictive, they assessed that the FOMC was well positioned to wait for more clarity. 
  
  
• Fed officials stressed that risks to inflation were tilted to the upside and risks to employment were tilted to the downside. This explains why the FOMC did away with the statement that “risks to achieving its employment and inflation goals are roughly in balance,” while asserting instead that “uncertainty around the economic outlook has increased.”
  
  
• The Fed remains firmly reactive, leaning heavily on incoming data. This high degree of data dependence supports the case for holding rates steady through midyear — an approach that diverges from market pricing, which continues to anticipate rapid and sizable cuts. So far, this cautious stance has served the Fed well amid the recent turbulence in trade policy. With little clarity on where the administration’s trade strategy will ultimately land, expecting a swift pivot toward aggressive easing would be premature.
  
  
• We believe the Fed will eventually decide to ease policy, but a late response to growing economic weakness will exacerbate the slowdown and favor three rate cuts in the second half of the year as the economy slows. 
   

Economic conditions and outlook

Participants observed that the economy continued to grow at a solid pace and labor market conditions remained broadly balanced, but that inflation stayed somewhat elevated. Generally, however, they noted the high degree of uncertainty facing the economy.

FOMC participants underscored that business contacts and survey responses pointed to softer household and business sentiment amid rising concerns about policy direction. Many Fed officials reported businesses pausing hiring or investment decisions due to uncertainty, while some flagged the inflationary implications of higher tariffs and restrictive immigration policies, which may further constrain labor supply and drive wages up in select sectors.

While core goods inflation has picked up — potentially reflecting anticipated tariff hikes — longer-term inflation expectations remain well-anchored. Yet, near-term inflation expectations have edged higher, reinforcing concerns about upside inflation risks and potential cost pass-through from businesses to consumers.

Amid these dynamics, Fed officials generally saw downside risks to employment and growth, and upside risks to inflation. Several voiced concern that a sharp repricing of risk in financial markets could amplify the economic impact of any negative shocks.

Staff perspectives

The staff projection for real GDP growth was weaker than the one prepared for the January meeting, as incoming data for aggregate spending were below expectations and the support from financial conditions had lessened. The staff’s inflation projection was a little higher, primarily reflecting higher-than-expected incoming data.

The staff used the same preliminary placeholder assumptions for potential trade, immigration, fiscal and regulatory policy changes, but stressed the elevated uncertainty regarding the scope, timing and potential economic effects of such policies. They also prepared several alternative scenarios.

The staff assessed that the uncertainty around their baseline projection had increased. They judged that the risks around their growth and employment projections had tilted to the downside due to downbeat household, business and financial market participant sentiment. The risks around inflation projections were still seen as skewed to the upside because of persistently elevated core inflation and because changes to trade policy could put more upward pressure on inflation than the staff had assumed.

Balance sheet management

Almost all members agreed to reducing the Committee’s securities holdings at a slower pace, with the monthly redemption cap on Treasury securities reduced from $25 billion to $5 billion and the monthly redemption cap on agency debt and agency mortgage-backed securities maintained at $35 billion. 

Federal Reserve Governor Christopher Waller, who supported no change for the federal funds target range, dissented in preference of continuing the current pace of decline in securities holdings.

Participants noted the importance of clearly communicating that slowing the runoff pace had no implications for the stance of monetary policy and would not affect the long-term path of the balance sheet (as announced in 2022).

Policy framework review

Participants continued their discussions related to their review of the Federal Reserve’s monetary policy framework, with a focus on labor market dynamics and the FOMC’s maximum employment goal. They generally supported the current description of maximum employment in the Statement on Longer-Run Goals and Monetary Policy Strategy as being not directly measurable and changing over time for reasons owing largely to nonmonetary factors. 

Participants also discussed the implications of pursuing a strategy that seeks to mitigate shortfalls of employment from its maximum level, as described in the statement, and the ways the public has interpreted that approach since it was introduced into the statement. 

They thought it would be appropriate to reconsider the “shortfalls” language and that any strategy conveyed in the statement should be robust to a wide range of economic circumstances.

Meeting recap

Whiff of stagflation keeps the Fed in a wait-and-see stance

• The Federal Reserve held the federal funds rate unchanged at 4.25%–4.50% at the March Federal Open Market Committee (FOMC) meeting. The unanimous vote in favor of the policy rate hold reinforced the Fed’s wait-and-see approach, with officials signaling little urgency to adjust policy amid elevated uncertainty in the economic outlook. Federal Reserve Chair Jerome Powell reiterated as much, saying that they “do not need to be in a hurry to adjust policy and are well positioned to wait for greater clarity.”

• The policy statement reaffirmed that inflation remains “somewhat elevated,” with labor market conditions seen as “solid” and the unemployment rate as having “stabilized at a low level.” Importantly, the FOMC did away with its statement that “the risks to achieving [the FOMC’s] employment and inflation goals are roughly in balance” and inserted that “uncertainty around the economic outlook has increased.” This was reflected in the FOMC projections, with nearly all policymakers noting higher uncertainty and upside risks to their inflation and unemployment rate projections.

• The Summary of Economic Projections (SEP) revealed a shift toward a more stagflationary outlook, with softer growth and higher inflation projected. Median GDP growth expectations were downgraded to 1.7% year over year (y/y) in Q4 2025 (vs. 2.1% in the December projections), reflecting an expected softer GDP print in Q1 along with a drag from tariffs and retaliation. The 2026 growth projection was also moved 0.2 percentage points (ppts) lower to 1.8% y/y. Most policymakers now see risks to the GDP outlook as tilted to the downside, a shift from December, when a majority of policymakers considered the risks to be broadly balanced.

• The core personal consumption expenditures (PCE) inflation projection for Q4 2025 was raised markedly by 0.3ppts to 2.8% y/y, while the 2026 and 2027 projections remained unchanged at 2.2% and 2.0% y/y, respectively. The Headline PCE inflation projection was revised up 0.2ppts to 2.7% in Q4 2025. Powell confirmed that “a good part” of the higher inflation projections reflected the impact of tariffs.

• When asked about the stable inflation projections in 2026, Powell noted that the Fed’s base case was for tariffs to have a transitory (one time level shock) effect on inflation, but he also added that this would depend critically on having anchored inflation expectations. He stressed on numerous occasions that he saw the wide range of survey-based and market-based measures as indicating long-term inflation expectations remained anchored. This is a bold statement, especially given the post-COVID-19 environment where the sweet taste of pricing power may lead to a more rapid and persistent inflation pass-through.

• Interestingly, the dot plot of median rate expectations was unchanged for 2025, with two 25 basis point (bps) rate cuts and a federal funds rate of 3.88% expected by year-end. However, the dot plot leaned mildly more hawkish, with eight policymakers seeing less than two rate cuts this year compared with four in December. And, while five policymakers forecast three or more rate cuts back then, only two did so in the latest projections. The dot plot showed that another 50bps of rate cuts are expected in 2026, in line with the December projections. Policymakers’ median estimate of the long-term neutral rate remained unchanged at 3%.

• When pressed about why the dot plot still showed two Fed rate cuts in 2025 even though inflation was expected to rise because of tariffs, Powell noted that weaker growth expectations and unusually elevated uncertainty were key factors. While Powell acknowledged that soft data reflected notable private sector worries, hard data showed the economy was still in good shape. 

• The Fed chair insisted that while recession risks had moved up, they were not high. A concern we have is that the Fed’s reactive stance risks leaving it behind the curve, as weakness in soft data generally filters through to hard data with a three-to-six-month lag.

• Unlike in 2024, when Fed officials were trying to ensure a soft-landing by easing policy to sustain a strong economy and accommodate favorable inflation developments, policymakers seem more focused on downside risks in 2025. But there are two camps. The first is more focused on downside risks to the economy. And the other more focused on upside risks to inflation. 

• Powell seems to sit in the middle, but his comments contained two critical Fed policy insights. First, the Fed “put” is gone – it will take much more than a 10% stock market correction for policymakers to provide monetary policy support. Second, given that monetary policy is perceived to still be restrictive, Powell seems to lean toward some additional policy accommodation if the economy weakens sustainably as a result of tariffs. This is because he appears to lean toward a transitory inflation shock from tariffs in an anchored inflation expectations environment. 

• Beginning in April, the FOMC announced, it 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 FOMC will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion. Interestingly, Fed Governor Christopher J. Waller, who supported no change for the federal funds target range, dissented in preference of continuing the current pace of decline in securities holdings.

• We continue to anticipate two 25bps rate cuts in 2025, in June and December. But nobody should 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 on a broad-based rise in long-term inflation expectations.