Powell discards pre-emption 

• Federal Reserve (Fed) leaves policy unchanged by unanimous vote as widely anticipated.

• Fed sees uncertainty as having “increased further” and sees risk of higher inflation and unemployment.

• Jerome Powell, Chair of the Fed, described the outlook as highly uncertain but both the economy and policy in a good place to wait and see.

• Powell said that "the costs of waiting to see are fairly low” and that now was not a time to be pre-emptive.

• We acknowledge substantial uncertainty surrounding the economic outlook, but place more weight on forward-looking data suggesting the need for monetary easing over the coming months.

• We also recognize the Fed Chair’s reserve for pre-emption.

• We push back our expectation for the first cut to September.• We then envisage successive cuts to 3.75% by year-end and to 3.25% by end 2026.

The Fed left monetary policy unchanged at today’s meeting: the Fed Funds Rate (FFR) target range at 4.25-4.50% and the interest on excess reserves at 4.40%. The pace of balance sheet unwind was also unchanged. This was all by unanimous vote, in line with our, and market-wide, expectation with none of the 84 economists surveyed by Bloomberg expecting a change.

The status quo was echoed in the accompanying statement. The Fed did acknowledge that “swings in net exports have affected the data” – accounting for the first recorded contraction in GDP in 3 years in Q1 2025 but maintained that “economic activity has continued to expand at a solid pace”. However, the statement conceded that economic uncertainty “has increased further” and added that it “judges that the risks of higher unemployment and higher inflation have risen”.

In a meeting without updated forecasts, attention focused on Fed Chair Powell’s press conference. Powell presented a committee that faced elevated uncertainty, but that he described to be in a good place to “wait and see”. Powell explained that the Fed was not clear what policies would emerge (from the administration), nor what impact they would have on the economy. He explained that tariff policies could put tensions on both sides of the mandate – as reflected in the statement – and that while the Fed would then decide how to react based on scale of divergence and expected persistence of divergence, it was not clear in advance what the timing, scope, scale or persistence would be. If that situation arose, he described the Fed’s task as “challenging”, but added that was not in the data right now. Two issues were clear. The Fed was looking at actual data – despite the fact that this is likely to lag real-time developments – and was wary putting weight on sentiment, despite what he described as an “outsized” change in sentiment. Powell also described the “costs of waiting as low” and that this was not a “situation when we can be pre-emptive”.

Our reading of current data is that the downside risks to activity - and hence the employment mandate - are likely to materialize over the second half of 2025 (H2 2025) and prove more persistent than the inflationary effects of the tariff price shocks, although we too acknowledge that this is highly uncertain. Accordingly, we currently expect the economy to warrant an easing in monetary policy from the summer. However, the Fed Chair clearly aired his reluctance to act pre-emptively. Our rate cut assessment is thus a combination of our underlying economic assessment and the Fed’s behavioural response. Powell’s caution about pre-emptive cuts – something that we suspect has not been helped by President Trump’s calls for lower rates, although Powell denied this had any impact – makes us more cautious about how soon the Fed might act. Having brought forward expectations for the first cut to June from end-year after Liberation Day, we now consider this too soon. On balance, we now consider the first cut as most likely in September, but then envisage the Fed having to ease consecutively through year-end to still leave the Fed Funds rate at 3.75% by year-end. We envisage cuts continuing into 2026, currently still pencilling 3.25% by end-2026. However, we acknowledge the uncertainty identified by the Fed, which could still see rate cuts emerge sooner if activity data shift more abruptly over the coming months. ​ ​ ​ ​ ​ 

Financial market reaction was suitably subdued after the Fed Chair’s equivocal assessment. Expectations for a June cut fell further to around 25% (there had been a 60% chance seen for two cuts post-Liberation Day). The probability of three cuts by year-end fluctuated around Powell’s press conference, but at the time of writing is little changed from before the announcement, suggesting a 16% chance of four cuts from 12% before. Longer-term rates were equally unaffected, the 2-year US Treasury yield fell 1 basis point (bps) to 2.78%, the 10-year was unchanged at 4.28%. The dollar rose by +0.2% against a basket of currencies.

Source: FRB, AXA IM Research, Mar 2025