The Federal Reserve is expected to remain inactive this week, with a 'stagflation scenario' likely reflected in updated economic forecasts. How will Powell balance the potential significant internal disagreements? Gold is hardly giving bears any breathing room...
At 2 AM Beijing time on Thursday, the Fed's interest rate decision and the updated quarterly economic forecasts from officials will be announced in Washington. Federal Reserve Chair Powell will hold a press conference 30 minutes later.
After two days of meetings, the Fed may keep interest rates unchanged, seeking time to assess the impact of Trump's policies on the US economy, which currently faces persistent inflationary pressures alongside increasing growth concerns.
The new tariff measures introduced by the Trump administration, along with retaliatory actions from US trading partners, have weakened consumer confidence and raised Americans' expectations for future inflation. Moreover, since some tariffs were delayed shortly after their announcement, the ultimate impact of the trade war on the economy remains unclear.
This uncertainty may lead policymakers to adopt a wait-and-see approach, reluctant to bind themselves to a specific policy path.
Diane Swonk, chief economist at KPMG, stated: 'Given the uncertainty, I believe there will be considerable divergence on the path to rate cuts.'
Policy Statement
It is widely expected that officials will keep the benchmark rate in the range of 4.25% to 4.5%, but Fed watchers say that given recent data indicating a slowdown in economic activity, the post-meeting statement may change slightly.
Economists say that references to an uncertain outlook and the balance of risks to employment and inflation targets may remain unchanged, but policymakers may delete references to the 'robust pace' of economic growth.
Updated Economic Forecasts
Since officials submitted their rate forecasts last December, the economic situation has changed significantly. The escalation of Trump's tariff threats, along with new data showing a decline in consumer confidence, has raised concerns about growth prospects, and the stock market has dropped significantly in recent weeks.
Swonk stated that more policymakers may express a preference for keeping interest rates stable, considering the uncertainties surrounding many of Trump's policies, especially in trade, which is a 'natural outcome.' 'Will our trade war be bad enough to cause a more severe economic recession? We don't know.'
According to the median estimates in the Summary of Economic Projections (SEP) from last December, Fed officials had projected two rate cuts this year. Economists widely expect that the Fed will continue to signal two rate cuts in 2025 in the so-called 'dot plot' this week. Fed Governor Waller previously stated that this remains his baseline expectation.
Many Fed watchers expect that the dot plot from December will show that officials have downgraded their expectations for economic growth this year and upgraded their forecasts for key inflation indicators compared to the December projections. Some also expect officials to raise their unemployment rate forecasts.
Guneet Dhingra, head of US interest rate strategy at BNP Paribas, stated: 'The forecasts will reflect a stagflation scenario. The question is how much 'stagnation' there is and how much 'inflation' there is. What worries me is that the Fed may appear more focused on the inflation part, or at least more than the market, which is likely to catch investors off guard.'
Bloomberg economists Anna Wong, Stuart Paul, Eliza Winger, Estelle Ou, and Chris Collins stated: 'The SEP may show that more officials expect fewer rate cuts this year: we believe there will be one to two cuts of 25 basis points. Even so, Fed Chair Powell will still try to remain neutral in the press conference, indicating that the Federal Open Market Committee's (FOMC) forecast will incorporate the overall impact of Trump’s policies. We believe that if a recession occurs, the Fed's rate cuts may come late.'
Traditionally, the Fed might respond to an economic slowdown by cutting rates to support the economy. However, because inflation remains above the Fed's 2% target, some economists question whether policymakers will maintain high rates to continue suppressing price increases even if the economy weakens.
Kathy Bostjancic, Chief Economist at Nationwide, said: 'The market has been anticipating earlier and more rate cuts because they are concerned that economic growth will be affected. This is possible, but I don't think the Fed is ready to start signaling such a move at all.'
Press Conference
Powell's press conference will be the focus of investors, who hope to receive assurances that the Fed will support the economy if necessary.
The Fed Chair has repeatedly emphasized that there is no need to 'rush' to cut rates while the economy remains in 'good shape.' He may reiterate that monetary policy is in a good position, allowing policymakers to wait for clearer signals of weakness in the labor market or rising inflation.
During the Q&A session, Powell may be asked to clarify whether he and his colleagues view tariffs as a one-time inflation driver or a persistent factor. He may also respond to questions about falling bond yields and declining stock prices, as the S&P 500 index has previously entered a correction zone.
Analysts will also focus on his assessment of the decline in consumer confidence and the rise in inflation expectations. A closely watched long-term price expectation indicator climbed for the third consecutive month in March, reaching the highest level in over thirty years. So far, Fed officials have indicated that long-term inflation expectations remain stable.
Balance Sheet
The Fed may soon slow the pace at which assets mature on its balance sheet, a process known as Quantitative Tightening (QT), and may even completely pause this process amid concerns that uncertainties surrounding the debt ceiling could create friction in the Treasury market.
After rarely discussing their quantitative tightening strategy publicly, officials revealed in the January meeting minutes that they discussed considering pausing or slowing down the quantitative tightening plan (which has been ongoing since June 2022).