FOMC Meeting of March 2025 Preview – Currency Thoughts

FOMC Meeting of March 2025 Preview

March 19, 2025

The message after the January Federal Open Market Committee meeting seven weeks ago that ended in a paused interest rate target of 4.25-4.50% and continuing balance sheet reduction was, number one that monetary policy and the U.S. economy are in a good place; number 2 that considerable progress had occurred in the mission of restoring price stability at a sustainable 2.0% medium-term pace, but the goal was not yet fully accomplished; number three, that with growth persisting and the labor market remaining solid with unemployment historically low, no urgency existed regarding the size and timing of further rate cuts until and unless the committee becomes more confident that price stability as defined above will be met eventually; and number four that the Fed’s reaction function will continue to be aligned with data related to its twin mandate, rather than to assumptions related to how such data will be affected by possible policy changes by the United States or in other economies. Many changes are under considerations, and the net repercussions on prices and economic activity of what actually transpires remains highly unclear.

The last policy meeting was not aligned with a scheduled update of Fed macroeconomic and interest rate forecasts, but this one will be. The previous update in December had revised 2025 growth and inflation upward, unemployment downward, and also indicated an expectation that its interest rate most likely would be lowered during 2025 by 50 basis points, just half of the previously indicated extent. These signals were pretty much synchronized with the scenario priced into financial markets. Since then, downside growth concerns have swelled significantly both on Wall Street and Main Street. Measures of business confidence and U.S. consumer sentiment have taken big hits. The dollar has fallen out of favor, with drops of 4.4% against the euro and 3.2% against the yen. The 10-year Treasury yield is 24 basis points lower now than then. The price of WTI oil is down around 8%, largely on downwardly revised expectations of future global growth. In a rarely seen occurrence over the past 15 years, U.S. equities have underperformed stock markets in other major economies by a substantial margin. The more bearish view on future economic growth has not caused financial market analysts or lay folks to be more confident about disinflation reviving in a sustaining way. Nonetheless, the shift in growth risks are seen trumping the downward stickiness of price pressure, and central bank watchers are giving more credence to the possibility of three rather than two rate cuts happening this year.

But nobody expects a cut to be announced today. At best, officials may announce at least a temporary halt in balance sheet reduction. What market players and U.S. business people are really hoping to hear is greater clarity from Chairman Powell of a road map for future policy changes. This he almost certainly cannot do. Powell will need to be careful not to stir President Trump’s ire, so he will be choosing his words even more carefully than usual. Even more telling, Powell can’t lay our an explicit road map of future policy for the simple reason that neither he, nor his FOMC colleagues, is in a position to know precisely how future data will play out. U.S. policy proposals and the foreign responses to such are playing out in an erratic stop-and-go fashion. An unprecedented array of changes is happening, with unknown lagged effects on real economies.

Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission. 

Tags: March 2025 FOMC Preview

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on Wednesday, March 19th, 2025 at 9:18 am and is filed under Central Bank Watch.
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