A wary Fed

The markets can be sure of one thing about the members of the Federal Open Market Committee: they are uncertain. During his press conference after they met yesterday, Federal Reserve Chair Jerome Powell used the word liberally with respect to the outlook, the impact of trade policies, forecasting and the balance of risks. In fact, he uttered “uncertain” or “uncertainty” 16 times. The term even made an appearance in the official statement: “Uncertainty around the economic outlook has increased,” without clues as to in which direction. In the end, one was equally hard pressed to say whether the meeting had a dovish or hawkish tilt.

One of the few definite aspects was that the Fed kept the fed funds target range unchanged at 4.25-4.50%. The Summary of Economic Projections (SEP) indicated that although the median “dots” were unchanged from December, the range of the “dots” for this year narrowed from 3.1%-4.4% to 3.6%-4.4%, and four of sixteen participants forecasted no additional easing this year. Policymakers still forecast two 25 basis-point rate cuts in 2025, two in 2026 and one in 2027. We also expect two quarter-point cuts this year, though are less sure about when they will arrive. The first is likely not until at least June. 

But other parts of the SEP turned sour from December. Economic and inflation projections reinforced increasing market fears of stagflation, as GDP estimates for 2025 fell from 2.1% to 1.7% and Core PCE rose from 2.5% to 2.8%. These likely reflect a shift in the mindset of the Fed and an environment that could prove to be difficult for the Fed to navigate.

Intriguingly, an older favorite Fed term—“transitory”—made a reappearance. Powell acknowledged that the firmer price pressures are somewhat due to Trump’s tariffs and should be transitory. The implicit claim is that the recent upward shift in inflation is just a(nother) one-time price adjustment without spillover effects. We shall see on this one. 

Powell also tried to dismiss the rise in survey-based inflation expectations by focusing only on the elements that supported his argument that the rise in short-term inflationary measures are mostly due to tariff concerns. In particular, he simply dismissed the surge—to the highest level in around 30 years—of longer-term inflation expectations in a recent University of Michigan survey as an “outlier.”

Tapering the taper

The Fed does not want a repeat of September 2019, when overnight repo rates spiked significantly as it reduced its balance sheet. In an attempt to prevent that, the FOMC dialed back the pace of the reduction of its balance sheet holdings. Starting in April, they will reduce the monthly amount of Treasuries that they allow to roll off their balance sheet from $25 billion to $5 billion.

That action also reflects concern about critical components of the liabilities—in particular the Treasury’s General Account—on the Fed’s balance sheet as a result of the Treasury managing at the debt limit, and movements in these components may obscure the true picture of the ampleness of bank reserves. But I think the real reason is for the Fed to avoid exacerbating funding pressures when the Treasury quickly rebuilds its cash balance whenever the debt ceiling is lifted.

At the end of the day, the Committee meeting was essentially a public acknowledgement of what we have all known: we are in a messy time abounding with uncertainty that is keeping the Fed from moving forward with policy changes.