Despite the increase in policy uncertainty, the Federal Reserve held its forecast steady at the March FOMC meeting with two rate cuts projected in 2025.
With tariff hikes and policy uncertainty causing waves of volatility to run through the markets in March, attention turned to the March 18-19 Federal Open Market Committee (FOMC) meeting. Investors were looking to see if the collective impacts would alter the Federal Reserve’s (Fed’s) path forward toward curbing inflation.
Based on the March meeting decision, which saw the federal funds rate target range hold steady at 4.25%-4.50% and the forecast for two rate cuts in 2025 remain in place, it appears the Fed is content to stay the course… for now.
“Just like for businesses and consumers, uncertainty continues to cloud the Fed's outlook. However, Fed Chair Jerome Powell managed to ease some of the market's fears by emphasizing that economic fundamentals, particularly the 'hard data,' remain strong,” said Raymond James Chief Investment Officer Larry Adam. “Powell also noted that recent inflationary pressures are expected to be ‘transitory,’ with the Fed projecting inflation to fall to 2% by 2027.”
Adam noted that his team anticipates the Fed will remain in easing mode and look to cut interest rates twice in 2025, in line with the Fed’s forecast.
The updated dot plot did reveal a shift from several Fed members, as four FOMC participants see no rate changes in 2025, up from just a single member in the December update. No changes were made to either the 2026 or 2027 projections, with two cuts expected in 2026 and one in 2027.
“As we noted after the December FOMC meeting, Fed officials were fine with extending the runway for achieving its two percent inflation target to 2027, rather than 2026,” said Raymond James Chief Economist Eugenio Alemán. “The latest Summary of Economic Projections confirmed our belief that the Fed is still OK with its December decision by keeping the two rate cuts it was expecting for 2025 unchanged.”
The Summary of Economic Projections (SEP) showed some downward movement in GDP growth projections, from 2.1% in December’s SEP to 1.7% in this new SEP. For 2026, economic growth was lowered to 1.8% from 2.0% in December and for 2027 it was also lowered to 1.8% compared to an estimate of 1.9% in the December SEP.
Fed members reacted to the increased uncertainty created by the new administration’s policies, and indicated in the post-meeting statement that “uncertainty around the economic outlook has increased.”
The rate of unemployment was increased to 4.4% in 2025 compared to 4.3% from the December estimate, while the rate of unemployment for 2026 and 2027 remained unchanged. Inflation was pushed higher, from a 2.5% rate for the headline PCE price index in the December SEP to 2.7%, while the rate of inflation for 2026 was changed from 2.1% in December to 2.2% with no change to the 2027 rate. The core PCE price index was also pushed higher, from 2.5% to 2.8%, while the 2026 and 2027 core PCE price indices were unchanged.
The Fed also indicated it was slowing down the reduction of its securities holding starting in April. It is going to reduce the monthly redemption of securities holdings from the current monthly $25 billion to just $5 billion while maintaining the monthly redemption cap of agency debt and mortgage-backed securities at $35 billion.
“The Fed's decision to slow its balance sheet run-off process demonstrates that it has multiple tools at its disposal to stimulate future economic activity,” said Adam. “With this dovish tilt, the Fed was able to ‘thread the needle.’ This sent the S&P 500 up ~1% and the 10-year Treasury yield fell four basis points to 4.25% following the meeting decision.”
The next FOMC meeting takes place May 6-7, 2025.
All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and the Raymond James Chief Economist and are subject to change.
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