Instant View: Fed doesn't change rates, will slow pace of balance sheet reduction

(Reuters) - The Federal Reserve held interest rates steady on Wednesday, as expected, but U.S. central bank policymakers indicated they still anticipate reducing borrowing costs by half a percentage point by the end of this year in the context of slowing economic growth and, eventually, a downturn in inflation.

Taking stock of the Trump administration's rollout of tariffs, Fed officials actually marked up their outlook for inflation this year, with their preferred measure of price increases expected to end the year at 2.7% versus the 2.5% pace anticipated in December. The Fed targets inflation at 2%.

But the Federal Open Market Committee also marked down the outlook for economic growth for this year from 2.1% to 1.7%, with slightly higher unemployment by the end of this year.

Fed Chair Jerome Powell said in post-statement news conference that he had no reason to believe that the U.S. was experiencing 1970s-style high inflation that prompted the Fed to sharply raise rates and induce a deep recession to defeat it.

The Fed also said it will slow the ongoing drawdown of its balance sheet, known as quantitative tightening, starting next month.

MARKET REACTION:

STOCKS: The S&P 500 extended a gain to close up 1.07%

BONDS: The yield on benchmark U.S. 10-year notes fell to 4.2504%. The 2-year note yield fell to 3.379%

FOREX: The dollar index extended pared a gain to +0.19% and the euro pared a loss to -0.4%

COMMENTS:

JACK MCINTYRE, PORTFOLIO MANAGER, BRANDYWINE GLOBAL (by email)

"You could define the March FOMC meeting with one word: uncertainty. That term was peppered throughout both the FOMC statement and Powell’s press conference. Therefore, it wasn’t a dovish or hawkish pause but an uncertain pause. Rightfully so, the Fed has less conviction, but it is aligned with the market in their view of where policy rates are headed. The Fed showed more concern about weaker economic growth and higher inflation stemming from government policy uncertainty. Clearly, this Fed doesn’t want to be in the mortgage business based on its meaningful slowing of quantitative tightening (QT) for Treasuries and holding the redemption for mortgages at the same pace. Bottom line, it was a humdrum FOMC meeting, but it was supposed to be since monetary policy isn’t what’s impacting the US economy right now. Remember, Trump 2.0 reflects different sequencing from Trump 1.0—with respect to the economy, government policy is in the driver seat."

DAN SILUK, HEAD OF GLOBAL SHORT DURATION & LIQUIDITY, JANUS HENDERSON, NEWPORT BEACH, CALIFORNIA (by email)

“The Federal Reserve's latest update came as a surprise, striking a slightly less hawkish tone than many on Wall Street anticipated. Amid persistent inflation and mounting economic uncertainties, the decision to maintain current interest rates while subtly adjusting its approach to securities holdings signals a cautious yet flexible stance. It conveys a clear message to the markets: despite the challenges, the Fed currently lacks the compelling data needed to adjust policy settings.

"In the initial market response, the downward revision to growth forecasts and the upward revision to unemployment rates have seemingly overshadowed the upward adjustment in inflation expectations. This shift underscores a recent change in market focus, with greater emphasis now placed on the risks of weaker growth outcomes, rather than the inflationary concerns that dominated discourse in recent years.”

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

"Basically, there were really no surprises here... What they did say was uncertainties are increasing. Obviously, they're referring to the tariffs. They did lower economic growth by a bit, and they said inflation remains a little bit sticky, but they didn't elaborate on that too much.

"The Fed is just going to take this wait-and-see attitude until the facts are known about what's going to happen with tariffs... I would say this was a balanced communique. They didn't say we're headed for some sort of trouble in the economy. They avoided that, and that is to a certain extent positive for stocks.

"The fact that they're allowing for fewer runoffs, that could mean a less crowded Treasury market."

EMILY ROLAND, CO-CHIEF INVESTMENT STRATEGIST, JOHN HANCOCK INVESTMENT MANAGEMENT, BOSTON

"There is a whiff of stagflation to this. You're seeing the Fed revising down their estimates for growth and revising up modestly their expectations for inflation."

"For the Fed, stagflation is a tricky one to navigate. They probably have to wait and see which force is more powerful, the higher inflation or the slowing growth."

WHITNEY WATSON, GLOBAL CO-HEAD, CO-CHIEF INVESTMENT OFFICER OF FIXED INCOME AND LIQUIDITY SOLUTIONS, GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK (by email)

“As expected the Fed adopted a cautious tone at this month’s meeting, remaining on hold as it waits for clarity on the growth outlook and changes to trade policy. Revisions to FOMC members projections had a somewhat “stagflationary” feel with forecasts for growth and inflation moving in opposite directions. For the time being the Fed is in wait and see mode, as it monitors whether the recent growth slowdown develops into something more serious.”

MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET SOLUTIONS TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON

"Given growing worries around tariffs and how they could affect U.S. growth and inflation, the Fed took a widely expected 'wait and see' approach on rates. We believe the next likely window for the Fed to lower rates will be May or later, and market analysts expect two cuts in 2025.

"For 2025, the interest rate market currently expects the Fed will cut rates to around 3.75% by year-end. A lot will depend on how the inflation-versus-growth trade-off develops—growth may continue weakening, and the Fed may need to cut rates more forcefully than expected."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"Tapering quantitative tightening was a little bit of a surprise. Based on the updated projections, tariffs are expected to have effects that reverberate for a couple of years, but the Fed isn’t likely to blink. Unlike in 2019 where the Fed decided to finally cut rates to address the growth slowdown from tariffs, this time the Fed is planning on staying the course."

MICHELE RANERI, VICE PRESIDENT AND HEAD OF U.S. RESEARCH AND CONSULTING, TRANSUNION, CHICAGO (by email )

"Despite the recent relatively positive Consumer Price Index (CPI) data, the prevailing consensus leading up to today's announcement was that the Federal Reserve would not lower interest rates. This expectation has indeed materialized. Nevertheless, it remains possible that indicators such as the aforementioned CPI data, along with upcoming unemployment figures, may lead the Federal Open Market Committee (FOMC) to consider rate cuts later this year, with the possibility of multiple rate cuts still on the table for 2025.

When rate cuts do begin to take place, this could incentivize consumers to re-engage with credit products they have been hesitant to utilize over the past few years. This includes mortgage products, both for purchase and refinance, as well as the automotive market. A more favorable borrowing environment could lead to new levels of lending activity and consumer confidence."

MICHAEL BROWN, SENIOR RESEARCH ANALYST, PEPPERSTONE (by email)

"On the whole, it is tough to argue that the March FOMC is a game-changer in terms of the broader policy outlook, with policymakers having just as much difficulty in assessing, and forecasting, the economy as every other market participant. As such, with risks to the dual mandate still broadly balanced, policymakers continue to 'play for time', with the bar for any rate reductions in H1 being a relatively high one, even if the direction of travel for rates is still lower.

"Further steps back to neutral, though, will require policymakers not only obtaining greater confidence in the economic outlook, but also further concrete progress back towards the 2% price target. The 'Fed put' remains considerably weaker than over the last couple of years, given the emergence of renewed upside inflation risks, hence leaving market participants without their familiar 'comfort blanket' for the time being. That, coupled with the chaotic nature of policymaking in the Oval Office, should see cross-asset volatility remain elevated, while also leaving equity rallies as selling opportunities in the short-term."

(Compiled by the Global Finance & Markets Breaking News team)