Fed reiterates policy will depend on incoming data

In its March meeting, the Federal Open Market Committee (FOMC) held the Fed Funds rate steady at 4.25%–4.5%, as had been expected by the market for the past month and a half. They also announced a slowing in the pace of their balance sheet reduction, lowering the cap on Treasury redemptions from $25 billion/month to $5 billion/month and leaving the cap on mortgage-backed security redemptions unchanged at $35 billion/month. Each of those steps was also generally anticipated by the market.

Much more important than the Fed’s policy changes were its updated macroeconomic forecasts and further clarity on how proactive or reactive the FOMC plans to be in the face of uncertain fiscal and trade policy, along with the potential slowing of the economy.

The committee’s statement made clear that the outlook is now more uncertain than it has been recently. In his press conference, Chair Powell followed that up by emphasizing that the Fed intends to be reactive as opposed to proactive in responding to policy changes. They’ll be data-driven and will wait and see, rather than trying to anticipate policies from Capitol Hill and the impacts those policies might have on the economy. Powell also highlighted that more than trade policy matters—immigration policy, fiscal policy, and regulatory policy will also have an effect and the net impact of all those changes will guide the Fed’s response. Overall, the Fed is not in a hurry to change rates and is well positioned to await more clarity before deciding on its next move.

Implications for rates

That increased macroeconomic uncertainty notwithstanding, the Fed’s base case still includes two additional rate cuts this year, bringing rates to 3.75%–4.0%. From there, the Fed forecasts rates gradually easing down to a long-term equilibrium of around 3%. Tariffs may delay progress in bringing inflation back to the Fed’s 2% target, but as long as it’s just a delay rather than a reversal, it still makes sense to bring rates toward that long-run neutral level.

While rate cuts were explicitly forecast and discussed, Chair Powell did not mention the possibility of rate hikes, so the bias in rates policy is clearly downward.

We continue to anticipate three cuts this year, but it’s a close call between two and three. We’ve been expecting to see more of a slowdown emerge in the data than the Fed has been modeling and, as we see data for April and May come in, we’ll have more of a sense of which way they’re likely to go.

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