FOMC Statement, Projections and Press Conference – Currency Thoughts
FOMC Statement, Projections and Press Conference
March 19, 2025
No change was made in the assessment of the U.S. economy of solid growth and labor market conditions, low and stable unemployment, and somewhat elevated inflation.
January’s statement called the economic outlook “uncertain and said risks were roughly balanced.” Today’s concedes a increase in the degree of uncertainty and deletes opinion that the risks are “roughly in balance.”
The federal funds target as expected was left unchanged at 4.25-4.50% for a second straight meeting. A decision was made to cut the monthly redemption cap on Treasury securities by $20 billion to just $5 billion, effective next month, but no change was made in the redemption cap on mortgage-backed securities, which stays at $35 billion. Governor Waller dissented from the change affecting Treasury securities.
As generally expected by analysts, projected economic growth was cut to 1.7% in 2025, 1.8% for next year and 1.8% in 2027. At the same time, predicted PCE inflation was raised to 2.7% this year from former forecasts of 2.5% made in December and 2.1% in last September’s update. PCE inflation is then seen receding to 2.2% in 2026 and 2.0% in 2027. Core PCE this was revised to 2.8% from a core inflation forecast of 2.5% made three months ago.
The median preferred federal funds rate still shows two 25-basis point rate cuts this year, but only 2 of 19 committee members had the rate below 3.875%.
In the subsequent press conference, Chairman Powell clarified the thinking behind the modification of quantitative tightening, noting that like the one prior time when the pace of Treasury holding runoff was also reduced, officials wish to approach an ideal balance sheet level more slowly. Like a car approaching a stop sign, they seek to slow the pace and lengthen the time before reaching the target rather than slam on the brakes all at once. The eventual balance sheet size hasn’t changed. The move is purely a technical one and not meant to signal a shift in monetary policy.
Many questions were related to the impact of tariff hikes on inflation, expected inflation and future monetary policy. Some of the recent acceleration of goods price inflation is believed to be tariff-related, but it’s very difficult to isolate that impact in a quantifiable way and also too early to what the tariff increases will be, how other countries will respond, and the eventual pass-through of higher tariffs to prices not impacted directly at first.
Reporters were puzzled that given the size of upward PCE inflation forecasts that no change had been made to the prior dot-plot projection of the presumed 50-basis point reduction of the federal funds target during 2025. Powell said tariffs no doubt played a role in the upward bias reflected in the inflation forecast but noted that higher assumed inflation was accompanied by assumed weaker growth and that each of those changes happened amid remarkably high uncertainty. With policy still well positioned as restrictive with the economy showing decent growth to the north of 2%, very low unemployment of around 4% and inflation stalled but not at levels way above the 2% goal, officials saw no urgency to change interest rate parameters pending greater clarity on exactly what policies get changed and how such impact hard economic data.
He did concede several times during the press conference an emerging divide between hard economic data like unemployment, growth, and retail sales and soft data like surveys of consumer and business confidence. The former remain quite acceptable, while the soft data have significantly softened, but a caveat was made of many instances where a change in soft data has failed to be mimicked by ensuing hard data. Prudence again suggested to officials to give things more time before committing to a policy course correction. This was only the second scheduled policy review of 2025. Even if no change is done at the next two occasions, officials would have four chances to make two rate cuts, if 50 basis points of reduction still seems like the most appropriate total for the year.
A final issue that emerged in multiple questions involved inflation expectations after Powell claimed such appear “well anchored.” Some measures of up to one-year-forward indicators of expected inflation have indeed picked up. Powell noted that such was to be expected. Tariffs raise prices in the short term and so will affect projections of inflation in 2025, whether such be privately compiled or those embodied in the central bank’s own forecasts. But the inflation forecasts that the Fed is most concerned about are the long-term projections, and whether market derived or survey derived, these ones have stayed aligned with the Fed’s definition of price stability.
A last observation to make is that the Fed is entrusted with goals that can often involve contradictory policy prescriptions. That happens to be the case now. If growth is slowing and perhaps headed for a recession that would entail higher unemployment, the policy response would be to cut rates. But if inflation that already exceeds target is at risk of climbing further, tightening would be in order. So which should be prioritized. The decision is not decided by a view that one or the other mandate always carries greater priority. It is decided instead by which which goal is getting missed to the greater extent. At the moment, neither miss is deemed huge, and neither miss is much larger than the other. It’s important to realize that not every central bank operates with multiple mandates or more mandates than policy tools. It is standard central bank-speak to assert that the best way monetary policy can contribute to full employment and solid economic growth is by preserving price stability, and Fed officials have often made that argument as well. The dual mandate did not originate within the Fed but rather was dictated by the Congress, which was responsible for the central bank’s creation and to whom central bank policy is held accountable.
Copyright 2025, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: FOMC statement and Powell remarks
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