Author: Ping An Shoujing Team; Source: Zhong Zhengsheng Economic Analysis

Core Views

On March 19, 2025, US time, the Federal Reserve announced the FOMC meeting statement and economic forecast, and Powell delivered a speech. Since then, the market trading style is similar to "loose trading": the 10-year US Treasury yield fell by 8BP to 4.24%, the three major US stock indexes rose, the US dollar index fell, and gold rose above $3,050 per ounce during the session.

Meeting statement and economic forecast: No interest rate cuts will be cut as expected, and interest rate cuts are still expected to be twice this year. The Federal Reserve maintained its interest rate in the range of 4.25-4.50% in March 2025, and plans to further slow down its balance sheet in April, reducing the rate of Treasury bond reduction from US$25 billion per month to US$5 billion. Compared with the January 2025 statement, this description of the economic outlook changed from "there is uncertainty" to "the increase in uncertainty", and also deleted the statement of "(two-way) risk approximate balance". Fed governor Waller voted against slowing down the balance sheet. In terms of economic forecasts, the median economic growth forecast for 2025 was significantly lowered from 2.1% to 1.7%, the unemployment rate was revised up from 4.3% to 4.4%, and the median inflation forecast for PCE and core PCE were revised up by 0.2 and 0.3 percentage points to 2.7% and 2.8% respectively; in 2025, the interest rate remained at 3.9% (two interest rate cuts), and the dot chart shows that the expectation of interest rate cuts in 2025 has weakened.

Powell spoke: "Unchanged" response. Powell's core idea is that tariffs and other factors bring huge uncertainty to inflation and economic outlook, and the Federal Reserve intends or helplessly choose to respond to "unchanged" and maintain the high flexibility of the currency. The key information it conveys includes: 1) It is difficult to assess the specific contribution of tariffs to inflation, but it is believed that (long-term) inflation expectations are still stable. 2) It is believed that the US economy is still stable because "hard data" such as employment and consumption are not weak, but some survey data related to expectations are weakened; although the probability of a US economic recession has increased, it is still not high. 3) The Fed does not need to curb inflation at the cost of recession, as in the 1970s. 4) Financial markets, including the stock market, are very important, but financial market volatility must be sustained enough to be paid attention to. These remarks have eased market concerns about "stagflation" to some extent.

Thinking: The economic and interest rate cut prospects still need to be revaluated; slowing down the balance sheet may be a temporary measure. Is the Fed willing to take care of the economy and stock markets in a timely manner and cut interest rates against the backdrop of rising inflation risks? It is difficult for us to judge from this meeting. The Fed may have expressed intentionally about the USThe optimism of the country's economy. But we are reserved about what Powell believes that the "hard data" of the US economy is still resilient. Regarding inflation, we also have reason to worry that the Fed's judgment is too optimistic: the Fed may not fully account for the impact of tariffs; the risk of upward inflation expectations cannot be taken seriously. We believe that compared with the benchmark expectation of a 50BP rate cut for the whole year, the more likely deviation is that the downward pressure on the US economy exceeds the current prediction of the Federal Reserve, which in turn creates a risk of a "compensation for the lowering" in the second half of the year, which makes the actual rate cut for the whole year exceed 50BP. A positive factor is that the Federal Reserve has relatively decisively announced a slowdown in the balance sheet, reducing the supply of the Treasury bond market and reducing the yield on US Treasury bonds. This may also be an important consideration for the Federal Reserve to temporarily choose to "hold on the interest rate".

Risk warning: The US economy and employment weakened beyond expectations, US inflation rose above expectations, and US uncertainty was high.

The Federal Reserve's March 2025 meeting did not cut interest rates as scheduled, but announced that it would further slow down its balance sheet in April. The latest economic forecasts are downwardly revised growth and upwardly inflation, but the median interest rate forecast is still expected to cut interest rates twice this year, although the dot chart shows that the expectation of interest rate cuts in 2025 has weakened. The core idea of ​​Powell's speech is that tariffs and other factors bring huge uncertainty to US inflation and economic prospects. The Federal Reserve intends or helplessly choose to respond to "unchanged" and maintain the high flexibility of the currency. Powell's remarks have eased market concerns about "stagflation" in the United States to a certain extent. However, we believe that compared with the benchmark expectation of a 50BP rate cut for the whole year, the more likely deviation is that the downward pressure on the US economy exceeds the current prediction of the Federal Reserve, which in turn creates the risk of the Federal Reserve's interest rate cut in the first half of the year and "compensation for the reduction" in the second half of the year.

1. Meeting statement and economic forecast: No interest rate cuts as expected, and interest rate cuts are still expected to be cut twice this year

The Federal Reserve's interest rate meeting in March 2025 will maintain the target interest rate of the federal funds in the range of 4.25-4.50%, in line with market expectations; at the same time, the Federal Reserve plans to further slow down its balance sheet in April, reducing the speed of Treasury bond reduction from US$25 billion per month to US$5 billion, and not changing the pace of MBS' monthly share reduction of US$35 billion per month.

Compared with the January 2025 statement, the statement's judgment on current economic activity, unemployment rate, labor market and inflation remains unchanged, but the description of the economic outlook has changed from "there is uncertainty" to "increasing uncertainty", and also deleted the statement of "(two-way) risk approximate balance", indicating that the Federal Reserve's concerns about economic uncertainty have risen. In addition, a member of the statement (Federal Governor Waller) voted against the resolution, indicating that he supported keeping interest rates unchanged but opposed slowing down the table., hope to maintain the current decline in securities holdings.

The Federal Reserve's economic forecast (SEP) released in March 2025, the main changes compared with December 2024 include:

1) Economic growth: The median economic growth forecast for 2025 was significantly revised down from 2.1% to 1.7% (already slightly lower than the Fed's long-term economic growth level), and the economic growth rate from 2026 to 2027 was revised down from 1.9-2.0% to 1.8%.

2) Employment: The median unemployment rate forecast for 2025 was revised up from 4.3% to 4.4%, maintaining the 4.3% forecast for 2026-2027 and the long-term level of 4.2%.

3) Inflation: The median forecasts of PCE and core PCE inflation rates in 2025 were revised up by 0.2 and 0.3 percentage points to 2.7% and 2.8% respectively; both indicators were 2.2% in 2026, 2.0% in 2027, and both long-term inflation forecasts were 2.0%.

4) Interest rate: The median interest rate forecast for 2025 remained at 3.9% (2 interest rate cuts within the year), the median interest rate forecast for 2026 remained at 3.4%, and the long-term interest rate forecast for 3.0%.

5) Dot chart: For 2025, among the 19 officials, 4 are expected to not cut interest rates (3 digits more than the last time), 4 are expected to cut interest rates only once (1 digit more), 9 are expected to cut interest rates twice (1 digit less), and only 2 are expected to cut interest rates three times or more (3 digits less). It can be seen that although the median forecast remains unchanged, officials' expectations for a rate cut in 2025 have weakened overall.

2. Powell's speech: "Unchanged" response

In general, the main focus of this press conference is how the Federal Reserve views the inflation outlook, economic slowdown pressure, and maintains the forecast of two interest rate cuts this year. Powell's core idea is that tariffs and other factors bring huge uncertainty to US inflation and economic prospects. The Federal Reserve intends or helplessly choose to respond to "unchanged" and maintain the high flexibility of the currency. The key information it conveys includes: 1) It is difficult to assess the specific contribution of tariffs to inflation, but it is believed that (long-term) inflation expectations are still stable. 2) It is believed that the US economy is still stable because of "hard data"(hard data)”For example, employment and consumption are not weak, but some survey data related to expectations have weakened; although the probability of a recession in the United States has increased, it is still not high. 3) The Federal Reserve does not need to curb inflation at the cost of recession as in the 1970s. 4) Financial markets, including stock markets, are important, but financial market volatility must be sustained enough to be focused. These remarks have eased market concerns about "stagflation" in the United States to a certain extent.

1) About inflation. The topic with the most frequent questions at this press conference is inflation. Many questions ask, how does the Federal Reserve evaluate the specific impact of tariffs on inflation? Powell said that at present, only some inflation can be said to come from tariffs, but it is difficult to accurately assess its contribution; commodity inflation rose significantly in the first two months of 2025, which is closely related to the implementation of tariffs, but the specific impact is difficult to quantify. Regarding inflation expectations, some reporters mentioned that various surveys have shown that short-term inflation expectations have risen. Will this change the Federal Reserve's assessment of inflation? Powell admitted that the short-term Inflation expectations do rise in part because of the implementation of tariffs, which businesses, households and market participants all mention the impact of tariffs on inflation. But he stressed that when talking about "well-anchored" it mainly refers to long-term inflation expectations; current long-term inflation expectations indicators (such as the break-even rate for the five-year or five-year forward) remain flat or slightly lower. But he also stressed that the Fed will closely monitor all inflation expectations data and will not ignore any signs that a long-term or medium-term inflation expectations have changed.

2) Regarding the expectation of two interest rate cuts this year. Many reporters questioned that since inflation forecasts have been revised up and inflation risks are also increasing, why does the Federal Reserve still expect two interest rate cuts this year? In summary, Powell believes that: 1) The slowdown in economic growth and the rise in inflation are balanced to a certain extent, and the overall economic situation does not show obvious signs of recession. 2) The current economic situation is highly uncertain, "In this highly uncertain environment, people may choose to maintain the status quo." 3) The current position can cope with uncertainty and choose to wait for a more clear experienceto ensure timely and effective adjustments.

3) Regarding the two-way risk balance. A reporter pointed out that the statement deleted the "roughly balanced risks of employment and inflation targets". Does this change mean that the Fed is more concerned about inflation or a certain aspect of employment? Powell said that the Fed has now passed the stage where it is necessary to emphasize the risk balance, so he deleted this sentence. This does not mean that the Fed is more concerned with one aspect of inflation or employment, but rather reflects changes and high uncertainties in the current economic situation, especially the impact of new changes (such as trade, immigration, fiscal and regulation) on the economy has not yet fully emerged, and these uncertainties make the statement of risk balance no longer applicable.

4) About the economy and employment. A reporter asked whether the slowdown in economic growth will have an impact on future spending and investment. Powell stressed that despite slowing economic growth, "hard data" (such as employment and consumption expenditure) remained stable, especially the unemployment rate remained at a low of 4.1%, and economic growth was still in a reasonable state. A reporter asked why the recruitment rate remained at a low level when the unemployment rate was close to 4% and whether the structure of employment growth indicates that there is weakness in private sector employment growth. Powell said that the labor market situation is still stable; although the unemployment rate is close to the natural unemployment level, the recruitment rate and layoff rate are low, which shows that the labor market is in a low-activity equilibrium; in the past year, employment growth has indeed been concentrated in educational institutions, health care, sectors and other fields, but the private sector has also performed well; from the Fed's perspective, employment is employment and will not be treated differently for different types of employment.

5) Regarding the risk of recession or stagflation. A reporter asked whether the current economic slowdown will increase the possibility of an economic recession. Powell pointed out that the possibility of a recession has always existed, usually around one-quarter; looking back, there is a one-quarter chance of an economic recession in any 12 months; although external forecasting agencies generally increase the likelihood of a recession, this probability is still at a relatively moderate level and is still within the traditional scope. The reporter asked, will the Federal Reserve curb inflation at the cost of an economic recession like in the 1970s? Powell quipped, "Unfortunately," the current situation is different from the 1970s, when inflation has dropped from a higher level to nearly 2%, and the unemployment rate remains at 4.1%, so there is no need to copy the response strategies of the 1970s.

6) About the stock market. A reporter asked, since the last meeting of the Federal Reserve, the stock market has fallen sharply. Are you worried that market fluctuations will have an impact on the real economy? Powell pointed out that financial market conditions (including stock markets) are against the United NationsSavings are important because this is the main channel for currency to affect the real economy. But he stressed that the Fed will not express an opinion on the reasonable level of any market, but will focus on changes in economic data from a macro perspective; changes in financial markets will have an impact on economic activities, but this impact needs to be substantial and persistent, and last long enough to attract the focus of the Fed. He believes that market sentiment data (such as consumer confidence surveys) show concerns and downside risks, but these have not yet translated into significant weakness in real economic activity.

7) About slowing down the table. The reporter asked why the Federal Reserve decided to slow down the balance sheet size, and is this adjustment related to the debt ceiling issue? Powell pointed out that slowing down the balance sheet size is a technical decision; the reduction in Treasury General Account (TGA) accounts has led to an increase in reserves, which has caused some signs of tightening in the money market; the discussion on adjusting the speed of balance sheet reduction was indeed initially caused by TGA account funds flows, but this adjustment is not just to deal with the debt ceiling issue. He stressed that this adjustment has nothing to do with the monetary position and will not affect the final scale of the balance sheet; slowing down the balance sheet shrinkage will help ensure that the balance sheet shrinkage process is smoother and closer to the expected target. Regarding the failure to adjust the MBS balance sheet reduction rate, Powell said that there is currently no plan to adjust the scale of MBS reduction, and the Federal Reserve will continue to gradually reduce MBS; and the Federal Reserve may continue to reduce MBS while maintaining the overall balance sheet size unchanged, but it has not yet reached that stage and no relevant decision has been made.

3. Thinking: The economic and interest rate cut prospects still need to be revaluated; slowing down the balance sheet may be a temporary measure

For this meeting, the most concerned issue of the market is whether the interest rate cut prospects will change. On the one hand, since the Fed's January interest rate meeting, the US economy has shown more signs of weakness, and the US stock market (S&P 500) has undergone a 10% adjustment. The market hopes that the Fed can consider a more timely and decisive interest rate cut, or at least communicate with the market. But on the other hand, the "New Federal Reserve News Agency" issued a "prophecy" on March 18, saying that Fed officials may further lower their forecast for the year's interest rate cut, from two in December to 1-2 times [1], which also caused the U.S. Treasury interest rate and the US dollar index to rise in advance before the Fed's statement was announced.

At this meeting, the dot chart did show that officials' expectations of interest rate cuts were slightly lowered overall, but fortunately, the median forecast remains unchanged, and interest rate cuts are still expected to be twice in 2025, and investors may not feel too "eagle" in their senses. But is the Fed willing to take care of the economy and stock markets in a timely manner and cut interest rates against the backdrop of rising inflation risks? It is difficult for us to judge from this meeting. A key reason is that the Fed may intentionally take the surfaceBy achieving optimism about the economy, this naturally avoids too much talking about the need for interest rate cuts due to economic downturn. This includes the latest economic forecasts still expect economic growth of 1.7% in 2025 and the unemployment rate to rise slightly to 4.4%, which is basically due to a state that is slightly weaker than a long-term reasonable level, and cannot be considered a significant economic slowdown, let alone a "recession".

But we are reserved about what Powell believes that the "hard data" of the US economy is still resilient. The GDPNow model predicts that the GDPNow model in the first quarter will be -1.8% year-on-month, of which consumption will only increase by 0.4%. You should know that most of the data based on this model is "hard data" closely related to GDP accounting (including retail sales, real estate, etc. recently). At least in the first quarter, the "hard data" in the United States may have cooled significantly. According to this trend, there may be room for downward revisions for the annual economic growth forecast.

We also have reasons to worry that the Fed's judgment is too optimistic. On the one hand, the Fed may not fully account for the tariff impact, at least not reflected in the latest forecasts. In 2025, the US PCE and core PCE inflation rates were only revised up by 0.2-0.3 percentage points. According to PIIE calculations, the combination of 10% and 25% plus and 25% plus and Inch tariffs (no countermeasures are considered) may increase US inflation by 0.54 percentage points in 2025. Not to mention that the current tariffs on China have been raised to 20%, and it is not ruled out that tariffs on automobiles, drugs, chips, wood, agricultural products and other products will be imposed in April, as well as countermeasures from trade competitors may also exacerbate inflation risks. On the other hand, the risk of rising inflation expectations has not been taken seriously. The Michigan surveyed one-year and five-year inflation expectations reached 4.9% and 3.9%, respectively, up 2.1 and 0.9 percentage points from December 2024, respectively. Since short-term inflation expectations will also affect the behavior of residents and enterprises, triggering the "self-realization" effect of inflation, what Powell called "stable inflation expectations" may not be completely scientific to look at only "long-term inflation forecasts".

We believe that compared with the benchmark expectation of a 50BP interest rate cut for the whole year, the more likely deviation is that the downward pressure on the US economy exceeds the current prediction of the Federal Reserve, which in turn creates the risk of the Federal Reserve's interest rate cut in the first half of the year and the risk of "making up for reduction" in the second half of the year. This may result in the actual rate cut of more than 50BP throughout the year.

A positive factor is that the Federal Reserve has relatively decisively announced the slowdown in balance sheet shrinking and slowing down the share reduction of Treasury bonds. Although Powell stressed that, in purpose, this decision had nothing to do with currency orientation. But slowing down the balance sheet, reducing the supply of Treasury bond market and reducing U.S. bond yieldsRates have a positive effect on the economy and the stock market, and may then objectively play the role of interest rate cuts. This may also be an important consideration for the Federal Reserve to temporarily choose to "hold on the interest rate". From this perspective, the Fed may not pursue excessive pursuing control of inflation in the future, but ignore economic and market demand.

Risk warning: The US economy and employment weakened beyond expectations, US inflation rose above expectations, and US uncertainty was high.