The FOMC kept the cutting bias intact with the median dot still showing two rate cuts this year, even as the central bank signaled readiness to remain patient to assess the impact of changes in the policy landscape on the economic outlook. Chair Powell brought back up the illicit “transitory” definition of inflation with respect to tariffs, which suggests that, at least at this point, the Fed sees the risks to growth overwhelming the risks to inflation over the medium term.

Trusted Insights for What’s Ahead^®

• The Fed kept its policy interest rate target unchanged at the conclusion of the FOMC meeting. They will likely remain patient in the coming months and leave rates unchanged until there is more clarity on how the new administration policies affect the economic landscape.
• It remains our view that the central bank will resume normalizing policy this year, although the risk is that the Fed could err more on the side of caution and delay further policy normalization, particularly if the pick-up in inflation expectations leads them to conclude that inflation expectations became unanchored.  Reflecting this caution, the Fed “dots” moved up, despite the median remaining at two cuts this year. The Summary of Economic Projections (SEP) showed eight policymakers now see one or no cuts, compared with only four in December. Eleven (vs fifteen) policymakers now see two cuts this year.
• The Fed referred to heightened “uncertainty” with respect to economic outlook in the statement and later Chair Powell discussed this issue at the press conference. We see uncertainty materializing as a significant factor weighing on growth in economic activity this year.
• With the Fed revising GDP growth down more significantly than they revised inflation projections, we think the stagflationary dilemma will likely resolve in favor of slower growth.
• Barring de-anchoring of longer-term inflation expectations, we anticipate that the negative impact on growth will likely overwhelm the impact of higher inflation, resulting in the Fed reducing policy rates in H2 2025. We continue to expect three rate cuts – in July, September and December.

FOMC Meeting Highlights

Uncertainty is the New Buzz Word

Introducing the word “uncertainty” into the statement highlights the Fed’s intention to stay on hold in the coming months until the policy landscape becomes more clear. However, uncertainty itself could be significantly detrimental to the outlook as it leads to businesses and households holding off on investing and consuming goods and services.

Source: "Measuring Economic Policy Uncertainty". (2012). Scott R. Baker, Nicholas Bloom and Steve Davis, The Conference Board, 2025

Tariffs were at least in part the driver of higher inflation forecasts, as Chair Powell acknowledged. The SEP saw core PCE inflation rising to 2.8% Q4/Q4 in 2025 vs. 2.5% in the December SEP. However, tariffs were also likely a key factor behind a sizable downward revision to growth (1.7% Q4/Q4 vs. 2.1% prior). Policy uncertainty, if it persists, can pull these projections even lower.

Is Inflation “Transitory” ? Powell Did not Hesitate to Use the Word

In a surprising move, during the press conference Chair Powell referred to tariff inflation as being “transitory.” It was unexpected, as many accused the Fed of being late in raising interest rates in the wake of a spike in inflation in the post-covid period. Back then, the FOMC also thought price increases were transitory.

By calling it “the tariff inflation,” Chair Powell seemed to intentionally split it out from the rest of the inflation developments. Moreover, inflation projections in the SEP saw a sizable upward revision only for 2025, while the FOMC participants left the rest of the profile little changed in the outer years – another nod to the temporary nature of an expected increase in inflation.

Inflation Expectations Still Anchored – At Least at a Longer-Term Horizon

Chair Powell seemed to have discounted the recent pick-up in certain measures of inflation expectations. He noted that the pickup is mostly related to tariffs and that the longer-term measures did not move much. In addition, he cited market-based measures of inflation expectations, which remained stable as of late.

Inflation expectations are a crucial factor for the Fed. As long as they remain anchored, the stagflation fear is unlikely to materialize, even during a period of low growth and high inflation – the outcome the Fed, and ourselves, are projecting for 2025.

Balance Sheet “Technical” adjustment

In a “technical” decision, the Fed slowed down the pace of the balance sheet run-off beginning in April. In particular, the central bank will lower the monthly cap on the amount of Treasuries on its balance sheet that it allows to mature without being reinvested, to $5 billion from $25 billion. It will leave the cap on mortgage-backed securities unchanged at $35 billion.

The decision was widely expected following the January FOMC minutes raised the possibility of a pause in QT to accommodate smooth functioning of the markets until the federal government is no longer up against the debt ceiling. The decision should not be viewed as policy accommodation or hinting one is coming up.