Fed leaves rates unchanged and maintains outlook for two rate cuts this year
Summary
On Wednesday, March 19, 2025, the Federal Open Market Committee (FOMC) voted to hold the fed funds rate at a target range of 4.25%-4.50%. The FOMC also decided to reduce the balance sheet runoff in Treasurys from $25B to $5B, with no change in agency Mortgage-Backed Securities (MBS). Chair Powell stated they have observed “some signs of increased tightness in money markets” as part of the rationale for reducing the runoff. The Fed’s projections continued to show two rate cuts for the year, but they reduced their projections for GDP, and increased their projections of core PCE. Chair Powell acknowledged the uncertainty surrounding tariffs and noted a “moderation in consumer spending” but believes they are “well-positioned” to respond. Overall, most of these changes were anticipated but the markets did react favorably as equites rallied and yields declined across the curve.
Source: Federal Reserve
Impact on rates
Rates across the curve initially declined on the news, likely as a result of the reduction in balance sheet runoff. While the Fed decisions certainly influence short-term rates, longer-term rates are driven by a confluence of additional factors including trade policy, fiscal policy, and global growth. As more developments unfold in the coming weeks, we are likely to see the volatility in rates continue.
Source: Chatham Financial
Source: Chatham Financial
Moving forward
Chair Powell was clear that the Fed was well positioned and was “not in a hurry” to make changes to monetary policy. The markets seem to be on the same page as there was no significant change in the probabilities for rate cuts. Chair Powell did acknowledge that the FOMC is in a position to quickly react should they see an unexpected deterioration in employment or growth. As more details are released in the coming weeks regarding trade policy, some of the uncertainty may dissipate.
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Disclaimers
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