Key Announcements from FOMC
The Federal Open Market Committee (FOMC) kept the federal funds rate steady at 4.25%-4.5%, continuing the current rate since December 2024.
Source: Federal Reserve Bank of New York. Target rate as of 19 March 19 2025.
The committee also revised its economic projections, downgrading its GDP growth forecast for 2025 to 1.7% (down from the previous estimate of 2.1% in December 2024). Citing tariffs and economic uncertainty, it also raised its inflation expectation. Core inflation is expected to grow at 2.8% annually, up from the previous 2.5%.
Lastly, the Fed announced a reduction in its “quantitative tightening” programme, scaling back the runoff of Treasury holdings to US$5 billion a month, down from US$25 billion.
What This Means
The FOMC’s decision to maintain interest rates despite the evolving economic outlook reflects a cautious stance. While the central bank acknowledges a potential slowdown in the economy, it does not foresee a severe downturn. Fed Chair Jerome Powell also highlighted that the impact of tariffs on inflation is likely to be transitionary. The expectation of two rate cuts later this year suggests that the Fed anticipates easing conditions ahead.
The scaling back of quantitative tightening also signals the Fed’s willingness to provide more liquidity to the market, which could support financial stability and ensure that the bond market remains sufficiently liquid.
While this move reflects a hint of accommodation, the Fed acknowledges the uncertainty caused by trade policies and their potential impact on inflation, but maintains its flexibility to respond to inflation data and the effect of tariffs. If inflation remains elevated, the Fed may hold off on rate cuts. Conversely, a significant economic slowdown could prompt more aggressive policy moves.
Markets generally interpreted the Fed’s message as dovish and responded as such:
Equities: The S&P 500 extended gains, closing +1.08%.
Bonds: The 10-year U.S. Treasury yield fell to 4.25%, while the 2-year yield dropped to 3.98%.
Forex/Commodities: The Dollar index pared gains to +0.19%, while the gold price hit a new all-time high.
How This Affects You
For investors, the latest announcements offer a mixed bag of implications.
- Interest rates are likely to trend lower.
The Fed has projected two more potential rate cuts in 2025, implying that the rate trajectory is likely to continue downward. This suggests that now could be the opportune time to invest in assets that benefit from a lower interest rate environment. Historical trends suggest that lower rates typically benefit bonds as bond prices rise when yields fall.
- Short-term uncertainty remains high.
A key theme from this FOMC meeting was uncertainty. This is driven largely by Trump’s unpredictable policy moves involving tariffs and their potential implications for the economy, as well as the outlook on inflation.
Investors should avoid taking excessive risks in the short term and instead build a more balanced portfolio through diversification.
- The “Fed put” is still in place.
Another key takeaway from this meeting is that the “Fed put” remains intact, meaning that the Fed is prepared to step in to support financial markets during periods of economic or market stress. In September 2024, when the economy softened, the Fed responded with a decisive 100 basis points of rate cut. We believe that, as of now, the Fed has sufficient monetary tools to respond to different economic scenarios. This supports the case for staying invested despite recent market selloffs. On the other hand, investors with a higher risk tolerance and a longer-term outlook may choose an equity-focused strategy such as Core Equity100. The current sell-off presents an opportunity to gradually build positions in equities at more attractive levels.
This article is for informational purposes only and should not be viewed as financial advice. It is not meant to market any specific investment, or offer or recommend the purchase or sale of any specific security. All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.Past returns are not a guarantee for future performance. Investors should consider his/her own circumstances. The information or advertisement contained herein does not constitute an offer, any solicitation, invitation or recommendation to engage in any investment activities.
