March 2025 FOMC Meeting Postmortem
The Fed kept rates on hold. The statement, updated forecasts and press conference suggests not a lot of policy easing, if at all, is in the pipeline for 2025.
As expected, the FOMC kept the Fed funds rate target range unchanged at 4.25%-4.50% but it used the post-meeting statement, forecast updates and press conference to signal a lot less of an appetite to cut rates as it is projecting the economy to be in stagflation mode this year. We likely will have at most one rate cut this year and we might see the end of the easing cycle by the time of the June FOMC meeting.
Key takeaways:
The FOMC kept the Fed funds target range unchanged at 4.25%-4.50%. The pace of reductions of the Fed’s holdings of Treasury and mortgage-backed securities was reduced again: beginning in April, the FOMC 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 while maintaining the cap on agency debt and agency mortgage-backed securities at $35 billion. There was one dissenter; Governor Waller voted against the slowdown in QT but agreed with the rate decision.
The statement following the meeting acknowledged more explicitly the uncertainty in the economic environment than in January.
Many FOMC members shifted their outlook and see even more upside risks to inflation than before, and most favor to deal with this year’s stagflation with a reduction in rate cuts compared to their initial projections back in December. While the updated SEP signals the Fed make no progress in pushing core PCE inflation back towards 2%, there is a significant risk that even this will not be achievable for the Fed.
After today’s meeting I now only expect one rate cut for 2025 (down from two cuts) to a Fed funds target range of 4%-4.25%, likely at the November or December FOMC meeting. Core inflation could turn out worse than in today’s SEP forecasts by May and June. Therefore, a growing risk exists that, by June, the Fed might decide to not cut at all.
Decision, Post-Meeting Statement and Post-Meeting Press Conference
As expected, the FOMC decided for the second consecutive month to keep the Fed funds rate target range unchanged at 4.25%-4.50%. The post-meeting statement acknowledged more explicitly the uncertainty in the economic environment than in January:
Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.Uncertainty around the economic outlook has increased. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in April, the Committee 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 Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; Alberto G. Musalem; Jeffrey R. Schmid; and Christopher J. Waller. Voting against this action was Christopher J. Waller, who supported no change for the federal funds target range but preferred to continue the current pace of decline in securities holdings.
FOMC Statement, March 19, 2025 (with annotations relative to the January FOMC statement).
Governor Waller dissented when it came to the further slowing of QT rather than the policy rate decision.
Chair Powell’s remarks at the post-meeting press conference underscored the message from the updated Summary of Economic Projections that the economy would enter a stagflation mode this year. The labor market is seen to remain relatively stable with GDP growth slowing and inflation accelerating. Powell acknowledged the near-term inflation expectations have accelerated and that is a risk the Fed is monitoring. Nonetheless, pointing to less pronounced upward moves in some longer horizon inflation expectation measure Chair Powell indicated that the stagflation impact, especially on inflation, would be ‘transitory’.
Although dared to use the dreaded ‘transitory’ word, again he did not seem to be that confident about it when prompted in the Q&A session. A lot of the economy’s performance, thus the Fed’s policy rate setting policy, would depend on the actions from the Trump administration in terms of tariffs, immigration, fiscal policy and deregulation, and three out those areas of concerns could turn out to be more inflationary than expected. It does appear that Fed’s outlook beyond 2025 in particular is heavily uncertain and, in my opinion, one should put less weight on the Fed’s public forecasts for 2026 or later.
The Fed’s Own View
FOMC members updated their forecasts for inflation, growth the unemployment rate and the Fed funds rate at this meeting. The inflation outlook was modified relative to December, where the median 2025 Q4/Q4 core PCE inflation projection was upgraded to 2.8% from 2.5% previously. Beyond 2025 the Q4/Q4 core PCE inflation projections remained, surprisingly, unchanged compared to the December SEP, with 2.2% for 2026 and 2% for 2027. This is in line with Chair Powell’s remarks that the expected inflation acceleration for 2025 is seen as likely to be transitory by the Fed.
The SEP projections for the unemployment rate also only changed for 2025 relative to the December SEP: from 4.3% to 4.4% in 2025, and unchanged for 2026 and 2027 at 4.3%. So, any unemployment increases due to stagflation this year is seen as transitory as well and signifies that the Fed will be tolerant to significant increases in the unemployment rate in 2025 given that as of February it sits at 4.1%.
The median Fed funds projections for 2025 and beyond did not change in this SEP update, implying 50bps worth of rate cuts in each of 2025 and 2026. This, again, aligns well with Chair Powell’s “looking through tariff hikes” spiel at the post-meeting press conference: the stagflation that likely will occur in 2025 will be limited to this year and thus the Fed can continue along its previously laid out path.
However, the underlying distribution of individual FOMC members’ policy rate projections provide a different perspective. The chart above presents box-whisker plots of these distributions for the last couple of SEP updates. Since the September rate cut, this 2025 Fed funds rate distribution has been shifting up as the labor market panic of the summer of 2024 faded. Relative to the December SEP, however, the 2025 Fed funds rate became more tightly distributed around a 4% Fed funds rate by end-2025. So, while the median 2025 Fed funds rate projections (red lines in the above chart) did not change since the December SEP, the central tendency (or middle 50% of the distribution) moved up noticeably. The change in underlying distribution of FOMC members’ Fed funds rate projections suggest to me that the stagflation this year likely means we will have at most one policy rate cut by the Fed.
The Fed’s SEP also provides a clue about the range of views within the FOMC on R*, using the central tendency for the longer run Fed funds rate and PCE inflation, respectively. The chart above suggests that compared to December the distribution of FOMC members’ own assessment of the neutral real rate became more uncertain again, with the median unchanged at 1%.
The chart above contrasts my surveys-based one-year real rate relative to the average and median of model- and market-implied R* estimates with a proxy of the Fed’s view on this real rate gap using information from its own SEP. This chart suggests that since the September FOMC meeting policy stance expectations from “Main Street” and markets have increased in restrictiveness over the one-year horizon. The disagreement amongst FOMC members with regards to the degree of restrictiveness of their policy stance over that horizon increased again. The market perceives the stance to more accommodative, which suggests an expected unwillingness of the Fed to lean fully against rising inflation expectations. I don’t necessarily agree with that, but it is reflective of a communication issue this Fed has had since the inflation acceleration of 2021-2022
Beyond Today’s Meeting
In the updated SEP the diffusion index for the unemployment weighting rose notably to a level not seen since the March 2023 FOMC meeting (chart above). The risk weighting for core PCE inflation already tilted notably to the upside back in December, and this perceived upside core inflation risk became even more severe after today’s SEP update. In fact, the risk diffusion index for core inflation is now at its highest level since the Fed began publishing its SEP back in 2007. Consequently, the central tendency of the Q4/Q4 2025 core PCE inflation projection shifted up more significantly than for the 2025 unemployment rate: 2.5%-2.7% → 2.7%-3% vs. 4.2%-4.5% → 4.3%-4.4%. The Fed clearly sees major stagflation risks around its outlook with inflation risk remaining a main focus for the Fed funds rate setting policy.
As can be seen in the chart above, the above discussed shift in the FOMC’s 2025 core PCE inflation projections put the 2025 year/year path in line with the one implied by the average month/month core inflation rate of 2024. This, of course, means that the 2025 Q4/Q4 core PCE inflation rate remains unchanged from 2024 at 2.8%. So, after five years of overshooting its 2% inflation target the Fed now projects that this year it will make no progress towards moving further down to 2%. Achieving the 2% inflation target is becoming increasingly uncertain for the Fed and the Fed needs to be careful with this kind of signaling as it will erode its medium-term credibility.
The year/year core PCE inflation path implied by the 2024 average month/month rate implies that the average month/month core inflation rate for March-December 2025 should be about 0.22%. With potential timing issues with regards tariff hikes and services inflation stickiness this average month/month rate might well turn out to be 0.25%. In the latter case the chart above indicates that the year/year core inflation rate would breach 3% by the end of the summer resulting in a 2025 Q4/Q4 core PCE print of 3.1% instead of 2.8% — a clear setback rather than standing pat on the road back to 2%.
The chart above also suggests that a differentiation between the 2025 core inflation path implied by the current SEP and those with an average month/month rate of 0.25% or more would likely become more apparent in the May and June data. The June FOMC meeting is therefore a “risk meeting”, where clearer signs of a faster inflation acceleration by mid-2025 would mean rate cuts will be off the table for this year.
To summarize:
The Fed expects stagflation to be a feature of the U.S. economy in 2025 but does not expect this to spill over into 2026.
Digging into the distribution of Fed funds rate projections of individual FOMC members, most want to limit rate cuts in 2025 to a single cut to deal with this stagflation. My modal outlook for 2025 is therefore now for only one (1) rate cut, to a Fed funds target range of 4%-4.25%, likely towards the end of the year (November or December FOMC meeting).
The May and June inflation data could give clues whether we’ll have an overshoot of the Fed’s 2025 Q4/Q4 core PCE forecast of 2.8%. Clarity on this would likely come at the time of the June FOMC meeting, so there’s a notable risk that the Fed then would decide to forego cutting its policy rate at all this year.