The Federal Reserve is expected to remain on hold this week, with the 'stagflation scenario' potentially reflected in updated economic forecasts. How will Powell balance the significant internal divergences? Gold hardly gives bears a chance to breathe...
At 2 AM Beijing time on Thursday, the Federal Reserve's interest rate decision and the updated quarterly economic forecasts from officials will be announced in Washington. Federal Reserve Chairman Powell will hold a post-meeting press conference 30 minutes later.
After two days of meetings, the Federal Reserve may keep interest rates unchanged to buy time to assess the impact of Trump’s policies on the U.S. economy, which currently faces both persistent inflation pressures and increasing growth concerns.
The new tariff measures introduced by the Trump administration, combined with retaliatory actions from U.S. trade 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 attitude, unwilling to bind themselves to any specific policy path.
Diane Swonk, chief economist at KPMG, said, "Due to uncertainties, I think there will be considerable divergences in the path of rate cuts."
Policy Statement
Officials are widely expected to keep the benchmark interest rate in the range of 4.25% to 4.5%, but Federal Reserve watchers say that given recent data showing a slowdown in economic activity, the post-meeting statement may change slightly.
Economists say that mentions of uncertain prospects and the risk balance regarding employment and inflation targets may remain unchanged, but policymakers may remove descriptions of 'robust pace' of economic growth.
Updated Economic Forecasts
Since officials submitted their interest rate forecasts last December, the economic situation has changed significantly. The escalation of Trump’s tariff threats, along with new data indicating declining consumer confidence, has raised concerns about growth prospects, and the stock market has seen significant declines in recent weeks.
Swonk stated that more policymakers may lean towards maintaining stable interest rates, considering the uncertainty surrounding many of Trump’s policies, particularly 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, Federal Reserve officials had previously anticipated two rate cuts this year. Economists generally expect that this week in the so-called 'dot plot', the Federal Reserve will continue to hint at two rate cuts in 2025. Federal Reserve Governor Waller had previously stated that this remains his baseline expectation.
Many Federal Reserve watchers expect the dot plot from last December to show that officials have downgraded their growth expectations for this year and upgraded their forecasts for key inflation indicators compared to last December. Some also expect officials to raise their unemployment rate predictions.
Guneet Dhingra, head of U.S. interest rate strategy at BNP Paribas, said, "The forecasts will reflect a stagflation scenario. The question is how severe the 'stagnation' will be and how severe the 'inflation' will be. I am concerned that the Federal Reserve may again seem more focused on the inflation part, or at least more so than the market, which could likely 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 expect one to two 25 basis point cuts. Even so, Federal Reserve Chairman Powell will still strive to remain impartial during the press conference, stating that the Federal Open Market Committee's (FOMC) forecasts will incorporate the overall impact of Trump’s policies. We believe that if a recession occurs, the Fed's rate cuts may come too late."
Traditionally, the Federal Reserve might respond to a slowdown in economic growth by cutting rates to support the economy. However, as inflation rates remain above the Federal Reserve's 2% target, some economists are skeptical about whether policymakers will maintain high rates to continue curbing price increases, even if the economy weakens.
Kathy Bostjancic, Chief Economist at Nationwide, said, "The market has been anticipating earlier and more rate cuts, as they are concerned that economic growth will be affected. This is possible, but I think the Federal Reserve is simply not ready to start signaling that yet."
Press Conference
Powell's press conference will be the focus for investors who hope to receive reassurance that the Federal Reserve will support the economy when necessary.
The Federal Reserve chair has repeatedly emphasized that there is no need to 'rush' to cut rates while the economy remains in a 'good state.' He may again highlight that monetary policy is in a good position, allowing policymakers to wait for clearer signals of a weakening labor market or rising inflation.
During the Q&A session, Powell may be asked to clarify whether he and his colleagues see tariffs as a one-time inflationary driver or a persistent factor. He may also answer questions about the decline in bond yields and the drop in stock prices, as the S&P 500 index has previously entered a correction zone.
Analysts will also focus on his assessment of declining consumer confidence and rising inflation expectations. A closely watched long-term price expectation indicator rose for the third consecutive month in March, reaching its highest level in over 30 years. So far, Federal Reserve officials have indicated that long-term inflation expectations remain stable.
Balance Sheet
The Federal Reserve may soon slow the pace of asset maturities on its balance sheet, a process known as quantitative tightening (QT), and might even pause this process entirely amid concerns that uncertainty over the debt ceiling could create friction in the Treasury market.
After rarely speaking publicly about their quantitative tightening strategy, officials revealed in the January meeting minutes that they discussed the consideration of pausing or slowing the quantitative tightening plan (which has been ongoing since June 2022).