The March 2025 FOMC meeting and press conference played out largely as we predicted in our preview earlier this week (MacroSuite subscribers received a version a week early).
The interest rate projections in this meeting’s Summary of Economic Projections came in slightly more hawkish than our hawkish scenario. As predicted, most of the members predicting three, four, or five cuts consolidated upwards to two cuts in 2025. However, a few more members at two or fewer cuts submitted higher rate projections. Although the median still remains at two cuts, eight members are now projecting either zero or one rate cuts in 2025. Long-run interest rate projections remained unchanged.
Projections for PCE inflation were marked up, with the bulk of the committee seeing 2.7 - 2.8 PCE inflation in 2025, up from 2.5 - 2.6%. No members are projecting less than 2.5% PCE inflation (from eight in December). Expectations for growth were marked down from a median of 2.0% to 1.7%. The median projection for the unemployment rate at year-end moved upwards slightly, from 4.3% to 4.4%.
Committee members’ assessments of uncertainty on all of the projected economic variables shifted higher. Their perception of the direction of the risks are all going in the wrong direction, with unemployment and inflation risks skewed to the upside and growth risks skewed downwards.
On net, this is a slightly dovish meeting. While some members are penciling in slightly fewer cuts, the median dot remains unchanged despite a mark-up in inflation projections. The unemployment rate projection is still relatively benign, which lowers the bar to pivot and begin cutting if the pessimism in the soft data begins to bleed into the labor market data.
None of Powell’s answers at the press conference here were surprising if one followed the Fedspeak over the intermeeting Fedspeak. As we predicted, he downplayed the rate projections as much as possible (calling it an “admittedly challenging” exercise; “what would you write down?”) and emphasized the extent of uncertainty in the economic outlook. The word “uncertainty” played prominently in today’s press conference.
When confronted with the deterioration in the soft data, he acknowledged the development but said that they would wait to see for signs in the hard data:
"The relationship between survey data and actual economic activity hasn't been very tight... we will be watching very carefully for signs of weakness in the real data."
He downplayed the rise inflation expectations in the University of Michigan survey:
"The longer-term inflation expectations are mostly well-anchored... People in markets are pricing in some higher inflation over the next year... but if you look out five years... you'll see that breakevens are either flat or slightly down."
Our take
The Fed is in a very difficult position. They face significant uncertainty over tariff policy and its potential effects on inflation and growth, even as inflation remains elevated. On top of that, the soft data is quickly deteriorating but has yet to show up in the hard data. This is a challenging environment to conduct monetary policy.
The uncertainty over tariffs put inflation targeting’s weakness on display. The Fed would prefer to look through tariffs if they end up being a one-off movement in the price level. However, with inflation still elevated, it will be very difficult to figure out what is tariff-related inflation and what is “other” inflation that the Fed would otherwise prefer to act upon. With the Fed currently undergoing framework review, this would be a perfect time to examine the use of nominal income targets (like our nominal gross labor income target) to guide monetary policy.
Delaying further rate cuts risks choking supply and productivity growth. The delay in reducing rates is likely to stifle much-needed investment in the housing sector. The pipeline of new rental supply threatens the Fed with another rental inflation problem next year. For all the Fed’s talk of the importance of productivity in allowing for faster wage growth under lower inflation, they haven’t digested the research showing that tight policy can have on restricting investment in productivity-enhancing technology.
Waiting for greater certainty on disinflation or waiting for the hard data risks putting the Fed behind the ball. For now, the Fed seems content to not act on the soft data and instead wait for the labor market data to break before moving. However, the messier the inflation data, the longer the Fed will have to wait to get clarity on the outlook. With persistently on-and-off tariff policy, it may be a long time until the Fed actually feels comfortable with the inflation trajectory. This significantly raises the risk of the Fed falling behind.
