Recent economic data points to a cooling economy through 2025, with signs of easing inflation and a more balanced labor market. While job growth remains solid, elevated continuing jobless claims suggest underlying labor market vulnerability if fiscal policy leads to slower growth. Yet, core inflation continues to hover above the Fed’s target, keeping policymakers cautious. As fiscal effects play out, investors brace for increased uncertainty and a possible steepening of the yield curve amid expectations of gradual policy normalization.
As broadly anticipated, the Federal Open Market Committee (FOMC) left the Federal Funds Rate unchanged at the range of 4.25 – 4.50% at the March meeting. Fed Chair Powell emphasized increased uncertainty around the economic outlook and the need for “greater clarity” before making changes to interest rate policy. He also acknowledged possible transitory inflationary impacts from tariffs. The summary of economic projections (SEP) indicated lower GDP growth, higher inflation, and higher unemployment estimates than December projections, along with roughly two 25-basis point rate cuts this year. The FOMC also announced a slowdown in the pace of balance sheet reduction.