Fed Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

As widely expected, the Federal Reserve left rates unchanged. Within the statement the language about the current state of inflation and employment were also untouched. However, there were some big changes elsewhere. The Committee added the following line “Uncertainty around the economic outlook has increased” which was an upgrade to the description of uncertainty while removing the following line, “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.” Chair Powell tried to downplay these changes in his press conference but if you look in the deeper into the Summary of Economic Projections you can clearly see that the uncertainty is more pervasive the balance of risk to economic growth and unemployment have clearly shifted negatively (see below). Recall the inflation balance of risk already shifted higher in December.

The other “surprise” was that the pace of QT was slowed down lowering the redemption cap on Treasuries from $25B to $5B starting on April 1. The cap for MBS runoff was unchanged at $35B. The minutes from the prior meeting noted that QT was being discussed so it was not completely out of the blue. Notably, Fed Waller dissented preferring to leave this pace unchanged. 

Moving to the Summary of Economic Projections GDP estimates were revised lower for 2025 to 1.7% from 2.1% and to 1.8% in out years which is also the longer run target. Unemployment ticked up slightly to 4.4% this year but otherwise unchanged. Inflation projections increased this year with core-PCE at 2.8% from 2.5% and expected to reach the Fed’s 2% target in 2027. The median DOTS were unchanged calling for 2 cuts this year but did shift in a slightly hawkish way.  The dovish outliers moved higher while there are now 8 officials that project 1 or no cuts this year (4 and 4) up from 4 in total in December (1 no 3 one cut). The SEP does paint a stagflationary backdrop. 

Ahead of the press conference the biggest response within financial markets was the move lower in Treasury yields which fell ~5bps across the curve from intraday highs, seemingly in response to the QT announcement. Equities had pulled back modestly from the morning highs ahead of the decision and rallied back to the high of the day. 

Moving to the press conference. Chair Powell's commentary was very consistent with what we heard from him prior to the media blackout. Overall, the description of the current environment pointed to a resilient backdrop. He did acknowledge that there were signs that the uncertainty has started to slow consumer spending trends and some readings of inflation expectations had moved higher. He also reiterated, “we do not need to be in a hurry to adjust our policy stance and we are well positioned to wait for greater clarity”. He quickly downplayed the SEP noting that the current environment made these projections particularly difficult and later noted there was some “inertia”.

During the first question of the day, there was another surprise that Chair Powell officially brought back Team “Transitory” a word most thought would have been retired from the Fed’s vernacular. He noted that some of the recent goods inflation seems to be tariff related and has likely pushed out the timing of  inflation returning to target. He went on to say that the base case is that tariffs will lead to a one-time price increase and will move through quickly. Hence suggesting that the Fed should look through this, though once again noting that there is not a high degree of confidence in that view. 

He spent some time talking about the survey data and increase in inflation expectations highlighting that survey data has not been a good indicator of economic activity in recent years. He said the  Committee digesting all of the information but will be attentive to the hard data. He continued to point to a reasonably strong environment while suggesting that the odds of a recession remain low. In terms of inflation expectations, he noted that most of the increase has been in 1yr expectations while longer dated surveys/market-based data have held steady (see below). He went on to call the U of Mich. survey an outlier. Recall the 1yr inflation expectations in this survey jumped to 4.9% while it was 3.1% in the NY Fed’s survey. 

Related to QT he downplayed this as a signal just saying that it was the appropriate time to slow the pace as reserves are being drawn down but said they still remain “abundant”. 

Chair Powell quickly dismissed the question related to President Trump’s firing of two independent officials on the FTC something Nick Timiraos has discussed recently. 

Overall, it remains clear that the Federal Reserve remains in wait and see mode but there is clearly some nervousness about where things might be heading. Treasury yields continued to move lower throughout the press conference. The 2yr yield ended down 6bps to 3.98% about 11bps off the intraday high. The 10yr was down 5bps to 4.24% (HOD 4.32%). The USD index fell from ~$103.50 to just over $103 after the statement.  

Equities extended to the upside during the press conference but faded into the close. The S&P 500 ended the session up just over 1% with the NYSE FANG+ index bouncing 2%, pretty much where they were when the Chairman began talking. Small and midcap indices were up ~1.5%. The complexion under the surface was consistent throughout the day with growth outperforming value. Consumer discretionary was the best performing with travel related stocks recouping some of the recent losses. Defensive sectors underperformed. 

I think much of the intraday volatility is related to this Friday’s options expiration with the S&P 500 stalling out just over 5,700 again. The first real technical hurdle for this bounce is just overhead for the index with the 200d currently just under 5,750 and the declining 20d moving average quickly approaching that level as well. I would note that the VIX closed below 20 for the first time since February. The ICE BofA MOVE index has also reversed sharply to ~91 from its recent highs ~115.

Looking ahead to tomorrow before the focus completely shifts to college basketball, there is some

global inflation data overnight and the Bank of England rate decision ahead of the US open. The US economic data includes claims and Philly Fed survey ahead of the bell followed by existing home sales and leading indicators after the open. 

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