The Federal Reserve concluded its March meeting and surprised no one by keeping the fed funds rate unchanged. Let’s go through the details:

 

• As I type this, Jerome Powell is delivering his prepared remarks at his press conference and reiterated his typical language of being “data driven”. He’s also talking about a higher-than-usual level of uncertainty. I agree with that assessment.

 

• This was one of the meetings where the Fed shows its “dot plot”. That’s the chart that shows the future expected fed funds rate for each Fed Governor. The last one in December showed an expectation of a 2025 fed funds rate of 3.75% – 4.00%. The new one has a plurality of Fed Governors in the same range, but the outliers are expecting higher rates. That means that as a group, the Fed Governors have slightly increased their expectation for the fed funds rate at the end of the year. More of them are expecting fewer rate cuts.

 

• The language in the press release previously said that the risk to achieving its unemployment and inflation goals are roughly in balance. That language was removed and replaced by language talking about greater uncertainty. Again, I agree with their assessment.

 

• The Fed had been engaging in $60B of quantitative tightening (reduction of the Fed’s balance sheet) each month. That was decreased to $40B meaning they’re reducing the rate of decrease. The Fed’s balance sheet is still too high despite the fact that they’ve reduced it substantially in the past year.

 

• Fed votes are typically unanimous. Governor Christopher Waller voted against today’s decision. He agreed with not changing the fed funds rate, but wanted to continue the prior rate of $60B of QT (quantitative tightening) per month.

 

• The economic projections for 2025 were all changed in a negative direction.

 

• Expected change in GDP reduced from 2.1% to 1.7%. (If this is due to a reduction in wasteful spending, it would reduce GDP, but also be a net benefit to the economy.)
• Expected unemployment rate raised from 4.3% to 4.4%. (Again, if this is due to reducing wasteful government employment, it would increase unemployment, but be a net benefit to the economy.)
• PCE inflation expectation rose from 2.5% to 2.7%. (This is likely due to expectations of potential higher priced due to potential tariffs. A recession would be likely to reduce PCE inflation which would not be a positive for the market.)
• Core PCE inflation expectations rose from 2.5% to 2.8%. (I reiterate the prior analysis here as well.)
• So, the Fed is expecting lower GDP growth, higher unemployment, higher inflation, and potentially fewer rate cuts. None of this seems bullish to me, but as I write this the market indexes are rising. I suspect the market is projecting more rate cuts due to the weaker economic projections (paying attention to the higher unemployment and lower GDP estimates and ignoring the higher inflation projections).

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

 

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