At this week’s policy meeting, Powell has the tricky task of both convincing investors that the U.S. economy is still solidly on track and conveying that policymakers are ready to intervene if necessary.
This week, Federal Reserve Chairman Jerome Powell faces a tricky task of both reassuring investors that the U.S. economy is still on a solid trajectory and signaling that policymakers are ready to act when necessary.
While the Fed chairman has been praising the resilience of the U.S. economy, Trump’s rapidly escalating trade war has triggered investor jitters, causing U.S. stocks to plummet over the past month. Bond yields have also fallen, and consumer confidence has likewise slumped as concerns about the economic outlook have intensified.
Dominic Konstam, head of macro strategy at Mizuho Securities USA, said, “Powell needs to give some kind of signal that they are paying attention to the situation.” He warned that while Powell may make it clear that officials aren’t targeting the stock market, they can’t ignore the recent slide.
The market widely expects the Fed to leave rates unchanged at its March 18-19 meeting, but traders now see a high probability that it will make three rate cuts this year, most likely starting in June. Economists generally expect two rate cuts, which is roughly in line with their expectations for the dot plot that policy makers will update this week.
Traders’ expectations for how much the Federal Reserve will cut interest rates this year have heated up
Powell’s emphasis on the central bank’s willingness to adjust borrowing costs in the event of problems in the labor market becomes even more important if officials continue to hint at only two rate cuts in 2025, some investors warned.
James Athey, a portfolio manager at Marlborough Investment Management, said: ‘To a certain extent, the Fed’s decisions may make things slightly better or slightly worse. But it’s clear that they can’t fully appease the markets, because much of the impact on market sentiment comes from the White House.”
The Trump administration hasn’t done much to downplay the risk of a recession beyond escalating and fickle threats of tariffs against America’s biggest trading partners. Trump said on March 9 that the U.S. economy faces a “transition period,” while his Treasury Secretary, Scott Bessent, noted that both the U.S. and the markets need to be “detoxified.”
How will the Fed respond to market reaction?
The most sensitive to the Federal Reserve’s monetary policy, two-year Treasury yields, has fallen nearly 60 basis points from the peak in mid-January, this month fell to a trough of 3.83%, the lowest level in more than five months. Although stocks rose on Friday, it was preceded by a sell-off that saw the S&P 500 tumble 10 percent from its peak. Wall Street’s so-called “panic index” – the Chicago Board Options Exchange Volatility Index (VIX) – climbed to its highest level since last August.
U.S. Bond Yields Slide as U.S. Stocks Sell Off
Nervousness in the markets has heightened the stakes for this week’s policy meeting, when officials are set to release new economic forecasts that are expected to give a sense of how much officials expect Trump’s policies to affect the economy. Policy makers are expected to slightly lower their forecasts for economic growth this year and raise their expectations for core inflation, which excludes food and energy prices.
But Powell may be reluctant to reassure investors that the Fed will act as soon as the economy shows signs of a recession unless there is a key rider: officials need to see evidence that inflation is continuing to move toward the 2 percent target they have set and that inflation expectations remain stable.
Sarah House, a senior economist at Wells Fargo, said, “We’ll hear the message that the situation remains manageable and that current policy is in a good place for the Fed to react in either direction depending on the situation – whether it’s in response to stubbornly high inflation or a more pronounced economic slowdown. What I’d like to hear more now is for them to be clearer about how they weigh the two sides of their responsibilities.”
Although consumer price inflation slowed in February and the producer price index was unchanged from the previous month, the components that make up the Fed’s preferred inflation gauge, the personal consumption expenditures price index, were largely firmer. This comes as a closely watched indicator of longer-term inflation expectations climbed for the third consecutive month to its highest level in more than three decades.
U.S. Consumer Confidence Plummets as Long-Term Inflation Expectations Soar
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said that until economic weakness is more directly reflected in the labor market, which could come in the form of weak job growth, rising unemployment or a surge in layoffs, such data limits the Fed’s ability to take action and lift the economy Ability.
Luzetti said, “There is a lot of uncertainty that is likely to be reflected in the actual data, but the Fed will be in a wait-and-see mode to see if that happens.” He doesn’t expect the Fed to cut rates this year. “At the same time, I think they’re seeing more evidence that they’re not done with their job of controlling inflation.” He said.
About two-thirds of economists said they expect officials to leave borrowing costs unchanged if the Fed faces economic weakness while inflation remains high, according to a Bloomberg survey.
Complicating the outlook for interest rates are other policies proposed by the Trump administration, such as tax cuts and deregulation, that have the potential to boost the economy and inflation in the coming months. Powell and his colleagues emphasized that they are watching the “net impact” of Trump’s policies on the economy and want to have a clearer picture of their overall impact before adjusting them.
Earlier this month, in his final public remarks before officials met this week, Powell said, “The U.S. economy is in good shape despite the high level of uncertainty. We don’t need to rush into action, and policy is in a good position to wait for the situation to become clearer.”
Change in QT pace?
Wall Street strategists will also be watching closely to see if the Fed gives any hints of a pause or further slowdown in the pace of balance sheet reduction, a process known as quantitative tightening (QT.) Minutes from the January meeting showed that policymakers had discussed the potential need to pause or slow down the process until members of Congress reached an agreement on the government’s debt ceiling.
Blake Gwinn, head of U.S. interest rate strategy at RBC Capital Markets, said, “The argument in favor of the Fed taking action in March is that officials had already discussed the issue. So why not just do that – because they can pause QT and then restart it at a later date.”
