In this article, we review:
- Key points following the Federal Reserve’s March meeting and Chair Jerome Powell’s press conference
- What we would consider to be a sense of “calm uncertainty” from the Fed regarding the economy and future monetary policy
- What both market bears and bulls might take away from the meeting and Powell’s commentary
- Our forecast for the year-end federal funds rate and our S&P 500® price target
The term “calm uncertainty” is not one bantered about very often, as it has a paradoxical ring to it. It denotes the aura of an unsure course ahead, while evoking some sense of confidence the ultimate destination will not be a disastrous one. While lacking in decisiveness and open to interpretation, these two words perhaps best describe the Federal Reserve’s March meeting. As a result, we would view this meeting and Fed Chair Jerome Powell’s post-meeting press conference as providing fodder for both market bears and bulls.
Market bears are likely to point to the following:
The Fed downgraded its view of the economy. The Fed left the current federal funds rate target range unchanged at 4.25%–4.50%. However, in releasing its quarterly Summary of Economic Projections (SEP), the Fed downgraded its view of gross domestic product (GDP) growth for CY 2025 to 1.7%, from 2.1%, and raised expectations of Personal Consumption Expenditures Core Inflation to 2.8%, from 2.5%. While one might have expected such revisions of lower growth and higher inflation as potentially stoking fears of stagflation, the markets for the most part shrugged them off as perhaps being not as drastic as feared and perhaps better than baked into the market’s recent decline.
New dot plot incrementally hawkish. With the SEP, the Fed also released its Participants Assessment of Appropriate Monetary Policy, more commonly known as the “dot plot”, an anonymous survey of its voting members as to where they expect the fed funds rate to be at various points in the future. While always closely watched, the dot plot historically has been far from clairvoyant. This quarter’s dot plot showed little change in continuing to represent a median expectation of a 3.75%–4.00% fed funds target range by year-end 2025. However, the overall range did display incremental hawkishness, with eight of the 19 Fed members expecting one or zero rate cuts in the year ahead, versus only three members expecting such a range back in December.
Statement language raises further concerns of uncertainty. In its official statement, the Fed replaced language stating the “risks to achieving its employment and inflation goals are roughly in balance” with the wording “uncertainty around the economic outlook has increased.” In doing so, the Fed appears relatively unsure of which side of its dual mandate could induce future action, therefore adding to market concerns of declining consumer spending or corporate capital investment as the economy and markets await clarity.
Market bulls are likely to take comfort in the following:
The Fed reduced the pace of its quantitative tightening. In a modestly surprising move, the Fed announced it would be reducing its monthly balance sheet Treasury bond holdings roll-off from $25 billion to $5 billion. In and of itself and all else being equal, we would view this as being additive to demand and enhancing liquidity in the Treasury bond markets over the year ahead and therefore a favorable development for longer-term interest rates.
Message of uncertainty was delivered against a calm backdrop. Powell’s post-meeting press conference, while fully admitting uncertainty, also presented an air of calm the markets likely found somewhat reassuring. Despite the Fed’s new and less optimistic view of the economy, Powell reinforced verbiage from the December meeting the Committee was prepared to adjust policy as needed and, despite economic uncertainty, did not see the current trends as displaying evidence of imminent contraction. Specifically, he stated the “real economy, the hard data, is still in reasonably good shape” and that inflation impacts of pending tariffs can potentially “go away quickly.”
Rate increases still absent from the conversation. Perhaps the most market-friendly comments occurred early on when Powell directly echoed previous language from December: “If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly.” The key takeaway, in our opinion, being that despite recent tariff concerns, the Committee still views the current fed funds rate as inherently restrictive and sees its choices as maintaining that level or reducing it — however not raising it. Reiteration of that position not to raise rates amid fears of tariff-based rising inflation is likely to be viewed favorably by the markets.
In summary, and while taking all of these points and others into account, we would side more with the bulls in viewing this March Fed meeting and Powell’s press conference as net dovish and likely incrementally favorable for the equity and fixed income markets. We maintain our year-end forecasts of two quarter-point rate cuts in 2H 2025 coinciding with a fed funds rate target range of 3.75%– 4.00% and an S&P 500 price target of 6,500.
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