Growth slows, inflation rises, Powell holds rates

At its March meeting, the Federal Open Market Committee decided to keep its benchmark policy rate unchanged at 4.25%-4.50% as expected.

The new Summary of Economic Projections showed a meaningful downward revision to growth forecasts, coupled with an upward revision to the inflation forecasts. Still, the median dot plot remained unchanged at two rate cuts for this year—an important reassurance for markets as there have been concerns that the inflationary impact of tariffs may obstruct the Fed from delivering additional accommodation as the economy weakens.

Furthermore, the Fed decided to slow quantitative tightening, reducing the pace of balance sheet runoff from $25bn to $5bn per month.

The challenging backdrop

Uncertainty

Fed Chair Jerome Powell immediately acknowledged the very uncertain economic outlook. Indeed, since the last Fed meeting in January, with the new administration in the process of putting through multiple significant policy changes, consumer and business sentiment has plummeted, inflation concerns have grown, and the broad economic outlook has become considerably murkier—a particularly challenging backdrop for Fed policymakers.

Inflation

While tariffs are expected to raise inflation in the near term, the longer-term impact is unknown. Powell noted that the Fed’s baseline expectation is that the tariffs will have only a “transitory” impact on inflation, but that they would be very focused on how long-term inflation expectations behave.

However, he was quick to dismiss recent surveys that have shown a spike in inflation expectations (such as the University of Michigan survey), pointing out that surveys do not necessarily lead actual data. Instead, he discussed market-based inflation expectation measures, which show a slight increase in short-term expectations but a slight dip in long-term inflation expectations. In doing so, he provided some reassurance that inflation is unlikely to prevent the Fed from delivering rate cuts to a slowing U.S. economy.

Economy

Recession fears have resurfaced in recent weeks. While the Fed expects a weakening in the economy, Powell did not appear overly concerned about recession. He pointed out that although consumers and businesses have become very concerned about downside economic risks, the hard data has remained strong. Indeed, he commented that the relationship between soft and hard data is not particularly tight, and so it is by no means a foregone conclusion that the economy will head toward recession territory.

Broad assessment

Overall, the Fed appears to be putting more weight on the downside economic risks than the upside inflation risks. However, with the economy still in decent shape, there is no immediate urgency to reduce policy rates. As a result, the Fed can still maintain its data-dependent approach to policy, preferring to wait and see how both government policy and the actual economic data evolve over the coming months before making any policy decisions.

Updates to the Summary of Economic Projections

Powell’s commentary around the economy and inflation were consistent with the new Summary of Economic Projections (SEP).

• The GDP growth forecast for 2025 was revised down from 2.1% to 1.7%, from 2.0% to 1.8% in 2026, and from 1.9% to 1.8% in 2027.
• The unemployment rate forecast was revised up only slightly in 2025, from 4.3% to 4.4%, and then was kept unchanged at 4.3% for the rest of the forecast horizon.
• The core PCE inflation forecast for 2025 was revised up, from 2.5% to 2.8%, but was left unchanged at 2.2% in 2026 and 2% in 2027. In other words, the Fed believes that the inflationary impact of tariffs will be short-lived.
• Notably, 18 of the 19 participants see upside risks to core PCE inflation. 

By contrast, and despite the changes to the economic forecasts, there was no change to the median dot plot. The median dot plot still sees two cuts this year, another two cuts in 2026, and one more in 2027, taking policy rates to a floor of 3.125%. The SEP’s median longer-run dot was unchanged at 3.0%.

However, there was a hawkish shift in the distribution of dots for this year. For 2025, 4 of 19 participants now see no cuts, 4 participants see just one cut, and only 2 of the 19 see 3 cuts.

Policy outlook

The stagflationary shift in the Fed’s economic projections may have instilled additional fear in markets. However, Powell delivered a fairly reassuring message, downplaying both recession risks and long-term inflationary risks. Policy uncertainty is elevated, but the Fed believes it has the time to wait for policy developments and to see how the economy responds. Importantly, they also have the policy space to deliver additional rate cuts as necessary.

Our own forecasts see the U.S. economy avoiding recession this year, although recession odds have certainly increased. The U.S. economy will need additional Fed cuts this year. We expect two cuts, one in May/June and another in September, with the potential for a third in December if the economy weakens more than we anticipate.