Two Cuts Still on the Table

Key Takeaways

• As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) at its second meeting for 2025 kept the federal funds target rate range at 4.25% to 4.50%.
• The expected number of rate cuts for 2025 remained the same at two.
• Projections for inflation and unemployment increased, while GDP growth estimates decreased.
• The committee decided to reduce the monthly capon Treasury securities from $25 billion to $5 billion starting in April, but noted this move should not be interpreted as a predictor of future monetary policy.
• The latest FOMC statement had meaningful changes from January, including the acknowledgement of increasing economic uncertainty.

At its March meeting, the Federal Open Market Committee (FOMC) saw 11 of 12 voting members agree to hold the fed funds rate range at 4.25% to 4.50%. This hold stance was well priced in by the market, as the week started with a 99% chance that interest rates would remain steady. While the base-case projection by many institutions has recently changed from one to three cuts this year, investors may hold off on hopes that lower interest rates will lift risk assets as the Fed continued to reiterate that it’s going to take a wait-and-see approach regarding tariffs and their economic impacts.

“If the economy remains strong, and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” Chair Jerome Powell said after the meeting. “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

The Fed’s first dot plot for 2025 was basically unchanged from December’s, showing two rate cuts for the year to finish at a range of 3.75% to 4.00%. Projections for the next two years also held steady with the fed funds rate range ending 2026 at 3.25% to 3.50% and 2027 at 3.00% to 3.25%. This will likely translate to two more 25-basis-points cuts in 2026, and one 25-basis-point reduction in 2027. However, the Fed did hedge on the projections, stating, “Uncertainty around the economic outlook has increased,” signaling more cuts could be on the way if economic conditions slow materially.

In the March Summary of Economic Projections (SEP), FOMC participants revised slightly upward the unemployment and inflation rates, while lowering their GDP growth forecast (citing economic and tariff concerns). Even though the unemployment rate decreased a tenth of a percent to 4.1% in February, the FOMC still expects it to finish the year at 4.4% and settle in at 4.2% over the long term. On the inflation front, Core CPI inflation in February came in at 3.14%, well above the Fed’s 2% target and current 2.7% projection for 2025. As for GDP growth, the median projection in the latest SEP decreased from 2.1% to 1.7% for 2025 and 2.0% to 1.8% for 2026.

The Fed’s most recent statement showed some meaningful edits from January, though the changes were mostly focused on the increased volatility in markets due to increased levels of uncertainty.

After the Fed announcement, the 10-year Treasury ended the day lower and finished at 4.25%; short and long rates were also lower. The Dow Jones Industrial Average and S&P 500 Index returned 0.92% and 1.08%, respectively, for the day.

10-Year Treasury Yield Over the Last 12 Months

‍In Conclusion

The second FOMC meeting of the year did not contain many surprises. Rates remained unchanged, as did the number of estimated cuts for the year. Also not unexpected, the committee acknowledged some of the near-term struggles for the economy by lowering its projections for GDP growth for each of the next three years. As for inflation, the committee’s revised it upward in the near term due to what Chair Powell and the committee felt will be the transitory effects of tariffs.

The importance of patience was reiterated, though the committee recognized the uncertainty surrounding the economy and appeared to be willing to act more quickly should economic data warrant accelerated and/or more interest-rate cuts. That said, while some recent projections from asset managers have been foreseeing inflation moving higher should trade wars persist, the Fed continues to stand by its wait-and-see stance.

While some of the near-term noise will likely continue to cause volatility across both equity and fixed-income markets, many of the policy decisions taken by the Trump administration since January have not worked their way into the economy. From the Fed’s current perspective, most of the issues plaguing investors appear to be acute and transitory, and the central bank will continue to wait to cut rates until their projected targets are in sight or the acute issues in the economy become systemic and the data warrants action.

"The new administration is in the process of implementing policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. It is the net effect of these changes that will matter for the economy, and for the path of monetary policy," he said. "While there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high.”

Definitions

One basis point is equal to 0.01%.

The Consumer Price Index (CPI) measures the overall change in consumer prices based on a representative basket of goods and services over time. Core CPI is the change in prices of goods and services, except for those from the food and energy sectors.

The Core Personal Consumption Expenditure (PCE) Price Index provides a measure of the prices paid by people for domestic purchases of goods and services, excluding the prices of food and energy. The core PCE is the Fed’s preferred inflation measure.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

The Summary of Economic Projections (SEP), known informally as the “dot plot,” is a collection of forecasts for the economy, inflation, the labor market, and interest rates offered by the seven Fed governors and 12 regional Fed presidents.

U.S. Treasury notes are debt securities issued by the U.S. and are loans made by the investor to the government with varying lengths of maturity.

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