Tariffs, inflation and the recession were central themes at the policy meeting in March.
The Federal Reserve concluded its two-day policy meeting on March 19th and did not change interest rates immediately after the second round.
For investors, the decision was widely anticipated to keep the policy rate between 4.25% and 4.5%.
Instead, the financial markets focused on the US Central Bank’s economic and policy forecasts and what Chairman Jerome Powell said at a post-meeting press conference.
“Overall, the meeting provided insight into how the Fed thinks about the current economic situation, but Charlie Ripley, senior investment strategist at Allianz Investment Management, said in a memo sent by email during the Epoch era.
Economic forecast overview
The economic forecast is a quarterly survey by members of the Federal Reserve and the president of the Fed Bank. Authorities emphasize where they think there is economic and monetary policy at the end of the year.
In the updated summary, central bank officials left their rate forecasts intact. Officials still believe the Fed will continue to cut interest rates twice this year, reducing the benchmark federal funding rate to a median of 3.9%. Additionally, it forecasts two more cuts in 2026 and 2027, with the long-term median policy rate falling to 3.1%.
Powell repeatedly made interest rates longer so that if central banks were comfortable and continued to perform in the US economy, they would make interest rates longer.
“If the economy remains strong and inflation does not continue to move sustainably to 2%, we can maintain policy constraints for longer,” Powell said on March 19.
“If the labor market is unexpectedly weakened or if inflation drops faster than expected, we can easer policy accordingly.”
However, the Fed signaled it could resume its rate cut campaign this year, but the agency believes inflation is higher than initially estimated.
The Fed’s preferred personal consumption expenditure (PCE) price index has been revised from 2.5% to 2.7%. Core PCE, which strips volatile energy and food prices, has also been changed from 2.5% to 2.8%.
“We see there’s no further progress in core inflation this year. We’re going sideways, a flatline of sorts, and sideways,” Powell told reporters. “We’re not asking you to write down how much this is from the tariffs, or how much it isn’t, but part of it is due to tariffs. We know that there are tariffs in it.”
Economic growth expectations have been downgraded. Actual changes in GDP growth were adjusted to 1.7% from the forecast of 2.1% in December. The expansions for 2026 and 2027 were revised down to 1.8% lower from 2% and 1.9% respectively.
The forecasts surrounding unemployment rates remained largely unchanged.
Customs and “temporary” inflation
The press conference on March 19th was central to tariffs and the potential impact on the US economy.
Various consumer surveys have recently reported a revival of short-term inflation fears among businesses and consumers. Tariffs are the “good part” of higher inflation expectations, according to Powell.
“Some of that, the answer is clearly part of it, and the majority of it comes from customs,” Powell said. “But we will work with other forecasters to separate non-capital inflation, tariff inflation.”
Shipping containers will be found at the Port of Auckland as trade tensions rise through US tariffs on March 6, 2025. Carlos Barrier/Reuters
Powell pointed out that the Fed is approaching its 2% inflation target, but the new administration’s tariffs could postpone inflation progress.
“I think once tariff inflation arrives, further progress may be delayed,” Powell said.
Still, if inflation continues in 2025, he showed that it is unlikely to continue in 2026 or 2027.
“It may be appropriate to look into inflation. If it disappears soon, if it’s temporary, it will disappear without us taking action,” Powell said. “That could be the case in the case of tariff inflation. I think it depends quite quickly and critically on tariff inflation, where inflation expectations are well-fixed.”
Short-term inflation forecasts are rising sharply, but market-based long-term inflation expectations are well interpreted.
With monetary policy in a solid position, Powell believes the Fed can accommodate the evolving situation. At the same time, policymakers must be patient in determining how much change in White House policy has impacted economic activity, business conditions and inflation trends, from trade to immigration.
“We have tariffs in it. We don’t know how big or how fast it is,” he said. “There’s a lot we don’t know, but we know they’re going to be tariffs. And they tend to lower growth. They tend to increase inflation first.”
The head of the Fed hinted at the first round of tariffs during President Donald Trump’s first term, adding that gaining tariff-driven inflation could be challenging. The government slapped taxes on washing machines, increasing prices, but the costs of dryers also increased, Powell said.
“Things happen very indirectly, so there will be a lot of work going to be done in the coming months trying to track it all down,” he said. “But in the end it’s too early for an important impact on economic data.”
The story of the recession at the Fed
Worries about the recession have made it clear to Wall Street.
Despite these developments, Powell believes there is no recession.
“We don’t make this prediction. Looking at external forecasts, the predictors have generally raised some potential for a recession, but still at a relatively moderate level,” he said.
He said there is usually one chance of a recession over the years.
When asked about 1970s-style stags (an economic environment of high inflation, high unemployment and stagnant growth), Powell dismissed the fact that the United States could repeat that decade.
“We’re not saying we’re in a comparable situation,” the Fed chair said.
Tapering of the balance sheet
Next month, the Federal Reserve will taperate its balance sheet reduction initiative.
A post-meeting statement from the FOMC confirmed that the agency would only allow $5 billion of Treasury to deploy its balance sheet from $25 billion a month. The Fed will cut mortgage-backed securities to $85 billion a month.
This is the second time the Fed has slowed down its quantitative tightening efforts.
“We really came to the view that this was a good time to make the move we made,” Powell told the press, adding that he received support to make the central bank slower.
Fed Gov. Christopher Waller was the only opposition vote against the body’s decision to reduce balance sheet outflows while stabilizing retention.
Christopher Waller will testify before the Senate Bank, Housing and Urban Affairs Committee at a hearing hearing on February 13, 2020 regarding the nomination of members to be designated by Washington’s Federal Reserve Committee. Sarasilviger/Getty Images
At the start of the coronavirus pandemic, the Fed dramatically expanded its balance sheet to $9 trillion. Since March 2022, the institution has reduced its holdings by about $2 trillion.
Flying high in April and shooting down in May
Will the Fed be able to pull the trigger with the May cuts?
Powell reiterated that the Federal Reserve is not in a hurry to take action as officials wait for even more policy clarity.
This response was different from previous newspaper meetings, which he said he and his colleagues had not spoken about future meetings or made decisions.
The futures market is betting that the easing cycle that began in September will be suspended again in May.
Ripley pointed out that the March meeting highlighted the Fed’s policy balance law.
“The results of this conference were in great sync with market participants’ expectations, but clearly illustrate the challenges that the Fed has in balancing growth and inflation expectations,” he said.
“With a policy approach sitting in your hands, this Fed has shown the difficulty of making decisions during periods of uncertainty and acknowledged that perhaps the best action is not at all.”
The next two-day FOMC meeting will be held on May 6th and 7th.
