Fed Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

The Federal Reserve left rates unchanged as was widely expected but equities, already weak coming into the event, fell further while rates climbed as the overall takeaways were hawkish. We won’t bury the lede. Perhaps the key message from Powell: “If we don't see that progress (on inflation) then you won't see the rate cut." 

The FOMC statement was little changed, with the addition of commentary on Iran a notable but very expected addition: “The implications of developments in the Middle East for the U.S. economy are uncertain” was added to the comment about general uncertainty about the economic outlook. There was an interesting evolution of the votes. Only Stephen Miran remained on Dissenter Island, keeping with his desire for cutting (25bp). There was talk of potentially three dissenters. After joining Miran as a Dissenting Cutter, Chris Waller returned back to the rest of pack in voting to keep rates unchanged.

We have become accustomed to Chair Powell uttering words like “patience”, “uncertainty”, and “data dependence” throughout his tenure. To no one’s surprise, he pulled out the ‘ole familiar book again, citing “the implications of events in the Middle East for the U.S. economy are uncertain”, but that higher energy prices will push up overall inflation in the near term, though its too soon to know the scope and duration of impacts.    

The last meeting in January lacked a Summary of Economic Projections (SEP), so this meeting’s update took on greater significance, especially coming in the middle of the Iran war and skyrocketing oil prices. Those projections showed both an increase in inflation, which was expected, as well as growth, somewhat surprisingly. GDP estimates were increased across projected timelines. That indicates that the Fed is looking at the oil shock as, eh-hem, transitory, and not creating demand destruction across the economy. That also makes it harder to justify rate cuts if growth estimates are increasing.

PCE forecasts moved higher as expected. However, with more uncertainty in the mix, the range of projections for PCE in 2026 doubled, from 0.5% (2.2% - 2.7%), to 1.0% (2.3% - 3.3%) as the top-end moved higher. The range for 2026 Core PCE also increased. 

Moving to the Fed Funds expectations (the Dots), the median dot still calls for only one rate cut this year. Markets had already pushed out the prospect of rate cuts over the last few weeks, pricing in just one cut coming into today. However the complexion of the plot shifted hawkishly.  Seven participants see no cuts this year, versus five in the last SEP. The range of rate expectations compressed from 1.8% (2.1% - 3.9%) to 1.0% (2.6% - 3.6%), which means uber-Dove Miran took his fed funds target up 50bp. Markets are now pricing in less than one cut the rest of the year (~18bp), versus one cut (26bp) yesterday and about 2 cuts (60bp) one month ago. Equities were already trading lower before the rate decision, with the S&P down 0.6%. The index drifted lower heading into Powell’s press conference at 2:30pm ET and continued to fall during it, eventually ending the day down 1.4%. 

Meanwhile, treasury yields moved sharply higher. They actually fell right after the initial statement came out, but the 2yr eventually jumped from 3.70% to 3.79%. Longer-tenors also rose. That in turn took the Dollar higher, as the US Dollar Index broke through 100. Gold and Bitcoin fell to their lows on the day, though Bitcoin seemed to be holding up better relative to other assets.

Lastly, Powell addressed his status as Fed Chair and future role. If a successor isn't confirmed by the time his term expires in May, he plans to stay on as Chair until a successor is in place. "That is what the law calls for."  He added that he wouldn't leave the board of governors while the Justice Department's investigation is ongoing. In his words, "I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality." Finally, he said he has not yet decided if he would remain as a governor if the investigation concludes or after a successor is named.

Looking ahead, the BOJ is up next, with a rate decision tonight. The EU, UK, Sweden and Switzerland quickly follow tomorrow morning. Tech will be in focus following Micron's earnings tonight- the stock is trading lower despite what looks like a very solid print. Economic data will include the weekly jobless claims.

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