Fed Expected to Hold Rates Steady at Key Policy Meeting

A ’tangible shift has occurred' in markets, from watching the Fed to monitoring politics, said one analyst.

Federal Reserve Chairman Jerome Powell after testifying before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on Feb. 11, 2025. Madalina Vasiliu/The Epoch Times

Consumer inflation expectations have intensified, the chances of recession have increased, and financial markets have been in turmoil. Despite these developments over the last several weeks, investors should not expect the Federal Reserve to come to their rescue.

The Fed will conclude its two-day Federal Open Market Committee (FOMC) policy meeting and economic observers anticipate the U.S. central bank will keep its easing cycle on hold for the second consecutive meeting.

According to the CME FedWatch Tool, the futures market overwhelmingly expects the Fed to keep the benchmark federal funds rate unchanged between 4.25 and 4.5 percent.

Monetary authorities have consistently advocated higher-for-longer policy restraint amid sticky inflation and policy uncertainty.

Fed Chair Jerome Powell has told market watchers that the institution is content with pausing its rate-cutting campaign. According to the central bank chief, the economy remains strong, and monetary policy is in a good position to respond to any abrupt changes to the outlook.

“With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said in his semi-annual monetary policy report to Congress.

“We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.”

Based on public comments from Powell and his colleagues, rate-setting FOMC members will not take action until there is more evidence that inflation is returning to the central bank’s 2 percent target and greater clarity surrounds the new administration’s fiscal, immigration, regulatory, and trade policy adjustments.

Adriana Kugler, a Fed governor, stated at a central bank event overseas earlier this month that rate policy will likely be on hold for an extended period due to upside inflation risks.

“Given the recent increase in inflation expectations and the key inflation categories that have not shown progress toward our 2 percent target, it could be appropriate to continue holding the policy rate at its current level for some time,” Kugler said in a speech at the Conference on Monetary Policy Transmission and the Labor Market held in Lisbon by the Banco de Portugal.

Christian Hoffman, head of fixed income at Thornburg Investment Management, says the financial markets would be shocked if the Fed followed through on a quarter-point interest rate cut on March 18.

Instead, markets will be attentive to quarterly Summary of Economic Projections updates.

This report summarizes projections for key economic indicators, such as GDP growth, inflation, and unemployment, in 2025 and the “longer run.” Markets also examine the report’s dot plot, a visual tool that highlights individual members’ projections for interest rates at the end of specific years.

Hoffman said in an email to The Epoch Times that the report “may offer a view into the Fed’s thinking or where their concerns lie.”

In December, inflation projections were significantly revised higher from the September outlook. Additionally, policy estimates were trimmed to two quarter-point interest rate cuts from four.

“Chair Powell spoke last week and conveyed that not much has changed in their thinking with risks fairly balanced. They’re in wait-and-see mode,” he said. “Chair Powell continues to do his best to avoid stumbling into a political minefield.”

Jerome Powell’s ‘Tone’ in Focus

After the March policy meeting, Powell will hold a press conference shortly after the FOMC’s gathering.

Wall Street will pay close attention to his responses and manner, potentially seeking additional insights into the direction of monetary policy.

Over the last few years, the leading U.S. stock market averages have frequently gyrated while traders monitor Powell’s answers to reporters’ questions.

Federal Reserve Chairman Jerome Powell speaks during a news conference at the William McChesney Martin Jr. Federal Reserve Board Building in Washington on Sept. 18, 2024. Anna Moneymaker/Getty Images

“There’s virtually zero chance the Fed cuts rates ... and there should be minimal changes to the official statement, so the key for investors will be 1) How many rate cuts the updated ‘dots’ show for 2025; and 2) Powell’s tone at the press conference,” Tom Essaye, founder and president of Sevens Research Report, said in an emailed note to The Epoch Times.

The press will likely flood the Fed head with questions surrounding inflation data, President Donald Trump’s tariffs, and economic growth prospects.

Powell has refrained from commenting directly on the current administration’s tariff plans. Instead, he has embraced a more academic approach to discussing trade policy.

Appearing at the U.S. Monetary Policy Forum earlier this month, Powell stated that tariffs could feed inflation. However, he also believes that the Fed needs to wait before crafting a policy response since policymakers have to determine various factors.

“You also want to be sure of a couple of things,” he said during a question-and-answer session. “If it turns into a series of things. If the increases are larger, that would matter, and what really does matter is what is happening with longer-term inflation expectations. How persistent are the inflationary effects?”

President Trump recently implemented 25 percent tariffs on all steel and aluminum imports and is poised to enact levies on Canada and Mexico over border and illegal immigration disputes. Additionally, the administration is set to introduce reciprocal tariffs on all U.S. trading partners as early as April 2.

Tariffs have fueled consternation among investors, consumers, and businesses. But while the president said that the United States will endure “a little disturbance,” he does not believe there will be much. Other administration officials have said the U.S. economy is undergoing a transition, though it does not guarantee a recession.

“So, the underlying economy is healthy,” Treasury Secretary Scott Bessent said in an interview with Fox Business Network’s “Mornings with Maria” on March 17. “There is no reason we have to have a recession.”

The Atlanta Fed’s GDPNow Model estimate indicates about a 2 percent contraction in the first quarter. Regional central bank economists clarified that the sharp downward adjustment to the widely watched model results from robust gold imports rather than a steep decline in economic activity.

May Up in the Air

At the start of the year, the financial markets were building on their post-election gains. Two months later, the Nasdaq Composite Index and the broader S&P 500 are in a correction, and the blue-chip Dow Jones Industrial Average is down more than 6 percent in the past month.

While Fed policy has been at the center of market swings since the onset of the coronavirus pandemic, a “tangible shift has occurred” among investors, switching from Fed watching to politics, Hoffman notes.

“This shift has continued to accelerate as interest in central bank policy has waned,” he said.

“Since January, we have bounced from a shifting political winds-induced market euphoria to growing trepidation surrounding the political rhetoric and agenda.”

The next two-day policy meeting is scheduled for May 6 and 7. By then, the data-dependent Fed will have a lot of information, including more inflation and employment numbers, the first-quarter GDP reading, and the effects tariffs may or may not have on trade flows.

Investors believe the Fed will hit the pause button again.