FOMC keeps rates on hold but signals it will keep cutting rates despite looming tariffs
FOMC Holds Rates Steady but Signals Future Cuts Amid Inflation Concerns.
The Federal Open Market Committee (FOMC) meeting delivered a policy outcome that, at first glance, might have been expected to weigh on market sentiment. As widely anticipated, the Fed left interest rates unchanged. However, the updated economic projections presented a mixed outlook. Growth forecasts were revised downward, the unemployment rate forecast was adjusted higher, and core inflation expectations were raised. Meanwhile, the dot-plot projections remained largely unchanged, continuing to indicate two rate cuts in 2025—consistent with the December release.
(Source: FOMC)
These developments suggest the possibility of stagflation or, at the very least, a mild form of it. Typically, such signals would lead to a cautious market response. However, equities extended their intraday rally, the U.S. dollar weakened, and Treasury yields declined. The latter move was likely influenced by the Fed’s decision to slow the pace of its balance sheet runoff, which added additional downward pressure on yields.
While market reactions can sometimes be difficult to interpret, the most plausible explanation is that investors found reassurance in the Fed’s measured approach. The central bank signaled a willingness to "look through" short-term inflationary pressures—such as those stemming from tariffs—rather than reacting aggressively. Notably, core PCE inflation projections were adjusted upward from 2.5% to 2.8%, yet the Fed maintained its plan for gradual rate cuts. This approach effectively lowers real interest rates, which can weaken the U.S. dollar and enhance the relative attractiveness of equities.
Additionally, the Fed acknowledged the high level of uncertainty surrounding economic policy and market conditions. Chair Jerome Powell highlighted multiple sources of uncertainty beyond trade, including fiscal policy, regulatory changes, and immigration policy. This recognition appeared to reassure investors, who interpreted the Fed’s stance as a commitment to supporting economic stability if conditions warrant intervention. The possibility of a "Powell put"—a willingness to ease policy in response to economic weakness—seemed to further bolster market confidence.
For investors, the key takeaway is that the Fed remains cautious but accommodative, balancing inflation concerns with a focus on sustaining economic growth.