For the second consecutive meeting, the Federal Open Market Committee (FOMC) maintained the target range for the fed funds rate at 4.25% to 4.50%. In a departure from recent statements, today’s communication omitted language that characterized risks to the committee’s dual mandate as “roughly in balance,” instead emphasizing increased uncertainty around the economic outlook. Away from this change, the other notable item in the post-meeting statement was the announcement that, beginning in April, the monthly pace of balance sheet reduction for US Treasuries will decrease from $25 billion to $5 billion, with the cap on agency debt and agency mortgage-backed securities (MBS) remaining unchanged at $35 billion. Although many forecasters anticipated a reduction in the pace of quantitative tightening (QT) later in 2025, the implementation of these changes as soon as April came as a modest surprise.
In the updated Summary of Economic Projections (SEP), median estimates for GDP growth were revised downward, while the projections for unemployment and inflation in 2025 were adjusted upward. Nevertheless, these stagflationary updates ultimately translated into unchanged median expectations for policy rates across all time periods when compared to the December 2024 SEP.
During the press conference, Federal Reserve (Fed) Chair Jerome Powell described the economy as “strong overall,” while noting that recent policy changes in trade, immigration, fiscal policy and regulatory policy complicate the reliability of near-term forecasts. In his evaluation of the incoming data, Powell differentiated between survey or “soft” data, which indicate “significant concerns about downside risks,” and “hard” data, which remain “solid.” He emphasized that the Fed continues to focus on the hard data and is well-positioned to respond promptly at the first signs of economic deterioration. As it relates to the labor market, Powell noted that although the unemployment rate is “pretty close to its natural level,” even a modest increase in layoffs would likely be met with heightened concern, given the currently low hiring rates.
On the inflation front, Powell was questioned about whether the committee currently views tariff impacts to inflation as being transitory or something more persistent. Despite previous misjudgments in the post-Covid period, Powell asserted that the inflationary impacts of tariffs during the first Trump administration ultimately proved to be transitory. He went on to emphasize that tightening policy in response to a temporary rise in inflation unnecessarily risks “lowering economic activity and employment.” Regarding inflation expectations, Powell downplayed the significance of survey-based measures, such as those from the University of Michigan, and instead emphasized the importance of market-based indicators, which he noted remain “relatively well anchored.”
From our perspective at Western Asset, the outcome of today’s FOMC meeting largely aligned with what we expected. The uncertainty stemming from unpredictable trade policy and the activity coming out of the Department of Government Efficiency, aka DOGE, is likely to persist in the near term. The ongoing uncertainty will continue to impact business and consumer sentiment, likely acting as a headwind to near-term growth. Progress on inflation has stalled in recent months, and further implementation of tariffs is likely to delay a return to the Fed’s 2.0% target. That said, the stance of monetary policy remains restrictive, the trajectory of inflation is still expected to trend lower (albeit at a slower pace) and the Fed remains well-positioned to provide support should the economy falter from here.