BY: Matthew Kimbrough
Portfolio Manager
Knowns and Unknowns
It could be said that the onset of Donald Trump’s second presidential term has coincided with an increase in policy-related uncertainty. In many ways, the new administration is acting more quickly than expected on tariffs, immigration, the war between Russia and Ukraine, and DOGE.
This uncertainty has also brought about an increase in volatility for financial markets. CBOE’s VIX Index had its first significant spike upwards since December, as U.S. equities declined this month and bond prices rose. Meanwhile, economists continue to grapple with the implications of significant new tariffs for Canada, Mexico, and China, our largest trading partners. As to what extent they will wind up being inflationary – this may depend on their tenure.
At any rate, in today’s world of knowns and unknowns, market participants will at least be approaching today’s FOMC meeting with a couple of points of clarity.
- The decision will be to leave the Fed Funds Rate at its present level. No cuts will take place today.
- We will receive a new Statement of Economic Projections. Investors are expecting the new SEP to acknowledge slower growth in 2025 and potentially higher inflation as well. There will also be a new Dot Plot, but leading up to the meeting, market expectations are roughly in line with what was last released in December (2 cuts for the remainder of 2025).
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was held steady, as expected, maintaining the current range at 4.25 – 4.50%. It was not a unanimous decision.
The Statement
This meeting’s statement contained several amendments, which are highlighted in the chart below.
New Economic Projections
The most significant changes to (or facets of) this quarter’s Statement of Economic Projections (SEP) document have been highlighted below:
1. The median Dot Plot projection stayed the same, showing 50bp of rate cuts in 2025
2. Unemployment projections were raised to 4.4% in 2025 from 4.3%
3. Core PCE inflation expectations were raised by 0.3% in 2025, from 2.5% to 2.8%
4. Real GDP is expected to be 1.7% for 2025, 0.4% lower than projected in December
Quotes from Powell’s Press Conference
“Uncertainty today is unusually elevated.”
“It is going to be very difficult to have a precise assessment of how much inflation is coming from tariffs. The answer is clearly some of it. We will be working on separating tariff inflation from non-tariff inflation.”
“We do see increases in short-term inflation expectations, but long-run inflation expectations are relatively well-anchored. Markets are pricing out inflation this way as well.”
“We do not need to be in a hurry to adjust our policy stance, and we are well-positioned to wait for greater clarity.”
The Market Reaction
Treasury yields fell 3-6 basis points following today’s press conference, while the S&P 500 rose just over 1% during the same period.
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