WASHINGTON, DC – MARCH 19: Federal Reserve Chairman Jerome Powell pauses while delivers remarks at a … More
Most people weren’t expecting the Federal Reserve’s Federal Open Market Committee to cut interest rates, and they didn’t. The benchmark federal funds range — the range of interest rates banks charge one another for overnight borrowing — remains 4.25% to 4.50%.
The real news is in everything else.
Where The Economy Was Going
Until December 2024, the growing assumption was that after a period of swiftly growing inflation and then time with higher short-term interest rates the Fed used to control the price increases, the country was coming to a rare so-called soft landing, where inflation would finally return to normal without a recession.
The assumption had been that interest rates would continue to drop as the Fed became more convinced that its dual mandate — maintaining stable prices and maximum sustainable employment — was in hand. Fed Chair Jerome Powell’s speech and Q&A session after the close of the FOMC meeting made it clear that the happiest result isn’t a given.
The FOMC statement noted that starting in April the Fed would “slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion.”
The Fed’s Latest Decision
Although the central bank didn’t lower rates, it is reducing the pace of quantitative tightening, which is when the Fed holds Treasurys and mortgage-backed securities bonds to maturity. This in theory raises the cost of borrowing by tightening the money supply instead of buying such assets. It’s another way to get some benefit of an interest rate cut, suggesting that the institution thinks there is the potential of an economic slowdown.
The Summary of Economic Projections, a roundup of what Fed officials separately think might happen in the upcoming future, showed a group expectation of real GDP growth being 1.7% this year. In the December 2024 meeting the projection for 2025 was 2.1%. The estimate for 2026 was 1.8% instead of December’s 2.0% and 2027, instead of 1.9%, was 1.8%.
Unemployment was projected to be 4.4% this year, not December’s 4.3%. The Personal Consumption Expenditures inflation number, which is the Fed’s preferred measure, is expected to be 2.7% rather than 2.5% and certainly not the Fed’s target of 2.0%. Expectations for 2025 core inflation, without the volatile food and energy components, is now 2.8% rather than 2.5%.
“Some near-term measures of inflation expectations have recently moved up,” Powell said. “We see this in both market and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor.”
Popular Expectations Lower
Expectations are an important aspect of economics and inflation. When people and companies expect inflation to worsen, they take actions that unintentionally help bring on what they fear.
“Economic activity continued to expand at a solid pace in the fourth quarter of last year with GDP rising at 2.3%,” Powell said. “Recent indications, however, point to a moderation in consumer spending following the rapid growth seen over the second half of 2024. Surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment.”
That last point is key. About 69% of GDP is consumer spending. Even though the economically top 10% of households perform almost half of consumer spending, the slowdown in spending was clear in the numbers released late last month.
Extended price growth won’t help and when Fed chair keeps using the term “tariff inflation” during the press conference after the FOMC, it suggests the central bank thinks current administration policies are going to make dealing economic decisions more difficult.