#MacroFriday: Fed Raises Inflation Expectations and Sees Growth Slowing
On Wednesday, the Federal Reserve kept its policy rate unchanged at 4.25%–4.5%. Yet the latest FOMC economic projections highlight growing uncertainty in the U.S. economy since President Trump’s inauguration.
In his post-meeting remarks, Fed Chair Powell acknowledged significant uncertainty surrounding the potential impact of Trump’s economic and trade policies. FOMC participants indicated that these proposals are inflationary and could lead to weaker economic growth in the U.S. A comparison of the March FOMC projections with the two previous forecasts (pre-inauguration) reveals a sharp rise in inflation expectations to 2.7%, alongside slowing economic growth projected for 2025.
Despite concerns over inflation, the Fed’s dot plot suggests that policymakers still anticipate two rate cuts in 2025. Notably, four FOMC members now expect rates to remain unchanged next year, up from just one in the December projections. While this may seem counterintuitive given the rise in inflation expectations and inflation still running above target, Powell pointed to weakening growth projections as justification. However, he emphasized that current hard economic data remains "pretty solid," while sentiment-based indicators are deteriorating. The Fed, rightfully, is awaiting further clarity before adjusting its policy stance.
Meanwhile, the Fed is also slowing the pace of its balance sheet reduction. Since initiating the runoff, securities holdings have declined by $2 trillion. The monthly redemption cap on U.S. Treasuries will be lowered from $25 billion to $5 billion, an adjustment that may help ease upward pressure on government bond yields.
comments powered by Disqus