As expected by surveys and the futures market, the Federal Open Market Committee (the FOMC) left US interest rates unchanged at 4.25-4.50% yesterday.
The FOMC kept its median interest rate projections (the so-called “DOTS”) of roughly two 25bps interest rate cuts in both 2025 and 2026 unchanged from its previous update in December.
Here Daniel Casali, Chief Investment Strategist at Evelyn Partners, the wealth manager, considers the outlook from here:
“After cutting interest rates by a full percentage point in the final three policy meetings of 2024, the FOMC paused in both the January and March meetings. Such caution reflects the uncertainty over the policies coming out of the second Trump administration on trade, immigration, fiscal policy and regulation. Furthermore, the inflation hangover from the pandemic still lingers. In January, the headline Personal Consumer Expenditure deflator (PCE) was up 2.5% from a year ago, higher than a 2% Fed target rate over the long run.
“Nevertheless, there are three signs to say that the Fed is already acting dovish through its messaging. Equity investors may interpret this as a Powell “put” on the market to limit downside.
“First, in the updated Summary of Economic projections from December, the FOMC maintained its bias to cut interest rates against higher inflation forecasts. The PCE deflator was revised up (+0.2% points to 2.7% in 2025 and +0.1% to 2.2% in 2026), while real GDP growth forecasts was revised down (-0.4% points to 1.7% in 2025 and -0.2% to 1.8% in 2026). By maintaining its rate cut forecasts, the FOMC seems to place a greater emphasis on downside risks to growth over inflation upside.
“Second, in the press conference about inflation expectations, Fed Chair Powell referred to tariff-led inflation as being “transitory.” This suggests that he is willing to look through data like the Conference Board’s 12-month forward annual CPI inflation expectations of 6% in February, its highest rate for two years. However, Powell’s dismissal of inflation expectations raises the risk that the Fed could be caught out by a potential acceleration in inflation down the road.
“Third, the FOMC announced a tapering of Quantitative Tightening starting on 1 April. The Fed now intends to lower the Treasury redemption cap from $25 billion per month to $5 billion per month, while maintaining the current rate of Mortgage-Backed Security roll offs. This suggests the Fed wants to ensure there is sufficient liquidity in the market when there is uncertainty over tariffs and the debt ceiling.
“The bottom line is that the FOMC seems dovish in its messaging. Given the policy uncertainty, the central bank does not want to become another source of volatility for financial markets.
“Looking forward, a weaker US growth outlook, and the fact that the US central bank is still set on cutting interest rates, should put downward pressure on the US dollar. Broadly speaking, a weaker US dollar, when accompanied by global growth, is typically positive for financial markets, as more money could potentially flow into risk assets, like stocks.”
