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March 19, 2025

The Federal Open Market Committee (FOMC) � the policy setting arm of the Federal Reserve � voted unanimously to hold the fed funds rate in the 4.25% - 4.5% range in March. The biggest change in the statement following the meeting was a new clause, “Uncertainty around the economic outlook has increased.�

The statement removed the line saying risks to inflation and employment goals were balanced. Fed Chairman Jay Powell said that the elimination of that line was not intended to be a signal. The verbiage was no longer useful. 

The forecasts by participants were revised significantly since December, the last time they were published. Growth was marked down, while unemployment and inflation were marked up. The move up in the range of inflation forecasts for 2025 was quite marked; that reveals a very hawkish bent. 

The projected trajectory for rate cuts held at two in 2025. However, those expecting one or no rate cuts increased from four to eight. Those expecting more than two rate cuts fell from five to two participants at the meeting.  

It would not take much for the Fed to stay on the sidelines all year. Powell said “We are in no hurry� to cut rates and that more “clarity� on how shifts in policy, notably tariffs, will play out is needed. Powell underscored how nothing in the trajectory on rate cuts was pre-set. 

He noted the rise in inflation expectations across several measures in his comments and that tariffs were cited as a reason for those increases. When asked directly about tariffs and the Fed’s higher inflation forecast, Powell said that “a good part of it� is coming from tariffs. 

He went out of his way to say that forecasts outside of the Fed showed an increase in inflation and slower growth in response to tariffs. The Fed is not an outlier.  

Separately, the Fed decided to scale back its quantitative tightening (QT) by slowing the pace at which Treasury bonds roll off its balance sheet. It is now capping the rolloff at $5 billion instead of $25 billion per month. That is separate from its decision on interest rates. Powell made that point repeatedly.  

The Fed is managing its balance sheet to avoid a liquidity squeeze in the Treasury bond market, such as we saw in September 2019. Powell described the QT process as a slower-for-longer drawdown in the balance sheet. He did say that the debt ceiling, which is forcing Treasury to take extraordinary measures is resulting in a drawdown in the Treasury General Account; this amounts to a reduction in liquidity in the banking system.  

The FOMC decided to continue its rolloff of mortgage-backed securities (MBS). The Fed has not met the monthly limit on that since there is very little churn in the housing market. Powell said, “We want the MBS to roll off our balance sheet.� That will take a long time.  

There was one dissent on the balance sheet decision. Governor Chris Waller objected to the end of quantitative tightening. Powell said that the consensus to slow the pace of its balance sheet runoff was very strong, suggesting that Waller was an outlier. That is unusual, especially from a Fed Governor. The minutes to the meeting will be interesting and add more color to the growing dispersion of views regarding the difficulty of the emerging environment.

Other central banks have raised the risk of stagflation and the need to keep policy restrictive in such a situation. Powell said the Fed was not in that place yet, but such a scenario would raise challenging issues for the Fed. If push comes to shove, the Fed will hold rates higher for longer to fight inflation instead of stimulating to avoid a more pernicious bout of inflation.