To The Moon

On March 19, 2025, the FOMC concluded its two-day meeting, a pivotal event for markets and policymakers navigating a complex economic landscape shaped by persistent inflation, new tariff policies under the Trump administration, and a resilient yet uncertain U.S. economy. The resolution, Jerome Powell’s subsequent press conference, and the market’s reaction provide critical insights into the Federal Reserve’s strategy and its implications for the economic outlook. This article delves into the FOMC resolution highlights, interprets the dot plot and Powell’s speech, analyzes the market’s performance, explores the reasons behind the stock market boost, and offers an analytical judgment on the current economic situation and future outlook.

FOMC Resolution Highlights and Minutes

The FOMC decided to maintain the federal funds rate at a target range of 4.25% to 4.50%, which aligned with broad market expectations. This marks a continuation of the Fed’s cautious approach following a series of rate cuts in late 2024—totalling a full percentage point—bringing the rate down from its earlier highs. The decision to hold rates steady reflects the Fed’s ongoing effort to balance its dual mandate of price stability (a 2% inflation target) and maximum employment, amidst heightened economic uncertainty. Key highlights from the FOMC statement and minutes include:

• Economic Assessment: The FOMC noted that economic activity continues to expand at a “solid pace,” with the labour market remaining strong and unemployment stabilizing at a low level, around 4%. However, inflation remains “somewhat elevated,” with recent data suggesting a stall in progress toward the 2% target. The committee raised its 2025 core inflation forecast (excluding food and energy) to 2.8% from 2.5%, signalling growing concern about price pressures, particularly driven by Trump’s new tariffs.

• Growth Downgrade: The FOMC lowered its 2025 GDP growth projection to 1.7% from 2.1%, reflecting worries about the potential drag from tariffs on economic activity. This downgrade, paired with the higher inflation outlook, points to a stagflationary tilt—where growth slows while inflation rises—a challenging scenario for monetary policy.

• Balance Sheet Adjustment: The Fed announced a slowdown in its quantitative tightening (QT) program, reducing the pace of balance sheet runoff from $25 billion to $5 billion per month. This adjustment increases liquidity in the financial system, as the Fed will purchase more Treasuries to replace maturing ones. Some interpret this move as a subtle easing of financial conditions despite the unchanged rate.

• Risk Assessment: The committee stated that risks to achieving its employment and inflation goals are “roughly in balance,” but emphasized the uncertainty surrounding the economic outlook. Notably, the statement avoided explicit mention of tariffs, though their impact was implicit in the revised forecasts. The FOMC reiterated its data-dependent approach, promising to monitor incoming information and adjust policy if risks emerge that could impede its goals.

The minutes, which were not yet released as of March 20, 2025, are expected to reveal deeper discussions on tariff-driven stagflation risks and the Fed’s reluctance to signal aggressive policy shifts. Historically, FOMC minutes provide insight into the range of views among members, and this meeting likely saw debates on how to navigate supply-side inflationary pressures versus demand-side growth concerns.

Dot Plot Interpretation

The FOMC’s Summary of Economic Projections (SEP), including the closely watched “dot plot,” offered a snapshot of members’ expectations for future rates. The median projection for 2025 remained unchanged from December 2024, forecasting a federal funds rate of 3.9% by year-end—implying two quarter-point cuts (50 basis points total). Given the downward revision in growth forecasts, this projection disappointed some investors who had hoped for a more dovish signal, such as three cuts.

However, the dot plot’s stagflationary tilt is telling: despite a weaker growth outlook, the Fed did not adjust its rate projections downward to stimulate the economy. This suggests that inflation concerns—fueled by tariffs and sticky price pressures—are outweighing growth worries for now. The dot plot also raised the unemployment forecast to 4.4% by the end of 2025, up from 4.3%, indicating a slight softening in the labour market, though still near historical lows.

The lack of a more aggressive rate cut signal reflects the Fed’s cautious stance. Some members likely factored in the uncertainty around Trump’s tariff policies, which could exacerbate inflation while slowing growth, making it harder for the Fed to ease policy without risking price stability. The dot plot underscores a Fed that is “stuck,” as some analysts noted on X, unwilling to commit to significant easing in the face of a stagflationary environment.

Interpretation of Powell’s Speech

Jerome Powell’s press conference provided further context for the FOMC’s decision. While the full transcript isn’t available at this early stage, Powell’s remarks likely built on themes from his recent speeches, such as his March 7 address at the U.S. Monetary Policy Forum in New York, where he described the economy as “in a good place” but highlighted policy uncertainty.

Powell likely reiterated the Fed’s data-dependent approach, emphasizing that there’s “no need to be in a hurry” to adjust rates—a stance he’s maintained in recent weeks. He probably acknowledged the stagflationary risks posed by tariffs, noting their potential to drive inflation higher while dampening growth, but avoided definitive predictions due to the uncertainty around the magnitude and duration of these policies. This aligns with comments from Fed Governor Adriana Kugler, who recently cautioned that “whiplash trade policies could do a lot of damage,” including pinning inflation at a persistently higher level.

Powell’s tone was likely less hawkish than some investors feared, which may have contributed to the market’s positive reaction. He might have downplayed immediate inflation risks, focusing instead on the economy’s resilience—solid GDP growth (2.3% in Q4 2024) and a strong labor market—while signaling that the Fed is prepared to act if growth weakens significantly. His comments on the QT slowdown, framing it as a technical adjustment rather than a policy shift, likely aimed to reassure markets that the Fed isn’t tightening financial conditions further.

One area of focus was likely the Fed’s ongoing monetary policy framework review, which began in January 2025. Powell probably reiterated that the 2% inflation goal is non-negotiable, but the review will explore lessons from recent years, such as the challenges of managing supply-side shocks like tariffs, to adapt the Fed’s approach.

Market Performance After the FOMC

The S&P 500 reacted positively to the FOMC resolution and Powell’s speech, rallying 1.71% intraday on March 19, 2025, EDT, as shown in the provided chart. The index rally reflects strong bullish momentum. This rally reversed earlier market jitters, as Wall Street indices had already inched higher at the opening bell on March 19, with the S&P 500 up 0.6% and the Nasdaq Composite gaining 1%.

The market’s initial reaction to the FOMC statement was likely muted, as the decision to hold rates steady was widely expected. However, the rally gained steam during and after Powell’s press conference, suggesting that investors found his tone reassuring. The slowdown in QT, interpreted as a liquidity boost, also supported risk assets. Gold prices, however, showed little reaction, hovering near $3,030 per troy ounce, indicating that the market didn’t see the Fed’s stance as a significant driver for safe-haven assets.

Interestingly, the 10-year Treasury yield rose from 0.66% to 1.44% during the session, a move that typically signals higher inflation expectations or reduced recession fears. Normally, rising yields can pressure equities by increasing borrowing costs, but in this case, the S&P 500’s rally alongside yields suggests a “risk-on” sentiment—investors may be betting on growth resilience despite tariff challenges.

Reasons for the Stock Market Boost

Several factors contributed to the S&P 500’s rally:

1. Relief from a Less Hawkish Tone: Investors had feared that the Fed might signal a more aggressive stance against inflation, such as removing one or both projected 2025 rate cuts. The unchanged dot plot (still forecasting two cuts) and Powell’s likely balanced tone alleviated these concerns, boosting confidence in risk assets.

2. Liquidity Boost from QT Slowdown: The reduction in balance sheet runoff to $5 billion per month was seen as a dovish move, increasing liquidity in the financial system. This supported equity prices, as markets interpreted it as a subtle easing of financial conditions.

3. Technical Momentum: The S&P 500 broke above its moving average and the psychological 5700 level, triggering algorithmic buying and short covering. This technical breakout amplified the rally, as seen in the chart’s sharp upward trajectory.

4. Optimism on Tariffs: Some investors may be betting that Trump’s tariffs are a negotiating tactic rather than a permanent policy, expecting trade tensions to ease over time. The Fed’s steady hand provided a backdrop for this optimism, reducing fears of an immediate economic shock.

5. Risk-On Sentiment: The simultaneous rise in Treasury yields and equities reflects a broader risk-on environment. Investors may be pricing in higher inflation but not a recession, viewing the Fed’s cautious approach as a sign that it will tolerate above-target inflation to avoid derailing growth.

Analysis of the Current Economic Situation

The U.S. economy in March 2025 is at a crossroads, displaying both resilience and vulnerability:

• Growth and Labor Market: The economy remains robust, with GDP growth at 2.3% in Q4 2024 and unemployment around 4%, near historical lows. Consumer spending has been resilient, supporting economic activity. However, the FOMC’s downward revision to 2025 growth (1.7%) signals concerns about tariff-related headwinds, which could dampen business investment and consumer demand.

• Inflation Pressures: Inflation remains a challenge, with core PCE at 2.8% in December 2024, well above the Fed’s 2% target. Trump’s tariffs are exacerbating price pressures by increasing the cost of imported goods, a supply-side shock that monetary policy struggles to address. As noted in recent surveys, rising inflation expectations add to the Fed’s dilemma.

• Tariff Uncertainty: Trump’s trade policies have introduced significant uncertainty, with the potential to both reignite inflation and slow growth. Economists worry about a stagflationary outcome, where higher prices coincide with stagnant economic activity, a scenario the Fed has limited tools to combat.

• Global Context: The dollar strengthened post-FOMC, with EUR/USD falling to 1.0860, reflecting the Fed’s relatively hawkish stance compared to other central banks. Global markets are also grappling with tariff impacts, which could lead to retaliatory measures and further disrupt supply chains.

The Fed’s decision to hold rates steady while slowing QT reflects a delicate balancing act: maintaining restrictive policy to combat inflation while providing enough liquidity to avoid a sharp slowdown. However, this approach risks being too timid—neither easing enough to support growth nor tightening enough to curb inflation effectively.

Economic Outlook for 2025

Looking ahead, the U.S. economy faces a challenging path:

• Stagflation Risks: The FOMC’s revised forecasts—a lower growth outlook paired with higher inflation—point to a stagflationary environment. If tariffs persist or escalate (a global tariff review is due on April 2, 2025), inflationary pressures could intensify, forcing the Fed into a difficult choice: raise rates and risk a recession or hold steady and risk unanchored inflation expectations.

• Monetary Policy Path: The dot plot’s projection of two rate cuts in 2025 suggests the Fed anticipates some cooling of inflation, allowing for modest easing. However, if inflation remains sticky or tariffs drive prices higher, the Fed may push these cuts into 2026, as some economists predict. Conversely, a sharper growth slowdown could prompt earlier or larger cuts.

• Market Implications: The S&P 500’s rally may continue in the near term if risk-on sentiment persists, but volatility is likely as markets digest tariff developments and incoming economic data. Rising Treasury yields could eventually pressure equities, especially if inflation expectations climb further.

• Global Risks: Retaliatory tariffs from trading partners could exacerbate global growth concerns, impacting U.S. exports and corporate earnings. The Fed’s cautious stance may not be enough to shield the economy from these external shocks.

Analytical Judgment

The FOMC’s resolution and Powell’s speech reflect a central bank caught in a bind: facing supply-side inflation pressures that its tools are ill-equipped to address while trying to avoid derailing a still-resilient economy. The decision to hold rates steady and slow QT is a pragmatic one, buying time to assess the tariff impact without committing to a specific path. However, this cautious approach risks being too reactive—failing to preemptively tackle inflation or support growth.

The dot plot’s stagflationary tilt is concerning, as it suggests the Fed is prioritizing inflation control over growth stimulation, even as the economy shows signs of slowing. Powell’s balanced tone, while reassuring to markets, may understate the severity of the tariff challenge. The Fed’s reluctance to signal more aggressive easing could embolden inflationary pressures, especially if businesses pass on higher costs to consumers.

The market’s rally, while a positive sign of confidence, may be overly optimistic. The S&P 500’s rise is driven by relief, liquidity, and technical factors, but the underlying economic risks—stagflation, tariff escalation, and global trade tensions—remain unresolved. Investors should brace for volatility as these uncertainties unfold.

In the broader context, the Fed’s independence is under scrutiny. Trump’s past criticism of Powell and his tariff agenda have shifted some macroeconomic control away from the Fed, as one analyst noted: “The Fed is not ‘in charge’ anymore, having relinquished control to the Trump administration.” This dynamic could complicate the Fed’s ability to manage the economy effectively, especially if political pressures mount.

Conclusion

The FOMC’s March 2025 resolution underscores the challenges of navigating an economy beset by supply-side shocks and policy uncertainty. While the Fed’s steady hand and Powell’s measured tone have bolstered market confidence in the short term, the deeper risks of stagflation and tariff-driven disruption loom large. The economic outlook for 2025 is uncertain, with the Fed likely to remain in a reactive mode until the tariff picture is clarified. For now, the stock market’s boost reflects a moment of relief, but the road ahead will test both the Fed’s resolve and the economy’s resilience. Investors and policymakers alike should prepare for a bumpy ride.

@TigerWire