United States
The FOMC kept its rate projections unchanged but increased its inflation projection and reduced its growth projection for 2025. The central bank also acknowledged increasing uncertainty in the economic outlook, while scaling back quantitative tightening.
We believe rate cuts will remain on the table later in the year. However, given the potential for continued policy uncertainty, we believe fixed income investors need to be diligent, prioritizing security and sector selection.
Two rate cuts still on the table for 2025
The FOMC announced a slowdown in “quantitative tightening” (QT). From April it will allow a limit of $5bn of Treasuries per month to “roll off” its balance sheet, down from $25 billion. However, it left its cap on agency MBS unchanged at $35bn.
Meanwhile, its quarterly summary of economic projections reflected higher inflation and lower growth forecasts for 2025.
It forecast headline and core inflation at 2.7% and 2.8% respectively at the end of this year, both up from its 2.5% forecast in December. It also projected GDP at 1.7% this year, down from its previous 2.1% forecast. Despite these adjustments, the FOMC kept its unemployment projections largely unchanged.
On balance the committee made no changes to its median “dot plot” forecasts for future Fed funds rates (Figure 1).
Figure 1: The FOMC projects an unchanged path of rate cuts1
Fed acknowledges tariff-related uncertainty
The central bank’s official policy statement noted: “uncertainty around the economic outlook has increased”. Chair Powell acknowledged uncertainty around tariffs and noted the committee considered them in its forecasts. Powell also noted the rise in near-term inflation expectations among consumers (Figure 2), but that the longer-run inflation expectations remain “well anchored” based on the totality of data
Figure 2: Consumer inflation expectations have continued to rise sharply1
Powell stated, “tariff inflation” may already be feeding through to goods prices and it could delay “further progress” on inflation but stressed that “we do not need to be in a hurry to adjust our policy stance and we are well-positioned to wait for greater clarity”.
We believe the Fed will remain biased toward cutting rates
We believe that two rate cuts in 2025 remains a sensible base case at present.
Although the Fed has increased its inflation outlook, Powell noted the central bank’s current base case is that the impact of tariffs will be “transitory”. In our view, the Fed may be more sensitive to any signs of consumer sentiment feeding through into demand and ultimately to labor market conditions.
With uncertainty and volatility potentially a continuing consideration, we believe that fixed income looks attractive. In our view rigorous sector and security selection could be particularly important
