Fed review: Cautious stability

The Fed’s updated economic projections sparked an initial dovish reaction in the markets, as 2025 GDP forecast was taken down to 1.7% (from 2.1%). Inflation forecasts were revised up for both headline (2.7%, from 2.5%) and core (2.8%, from 2.5%). The widely followed median rate projection remained completely steady through 2025-2027 and also the distribution of individual forecasts was little changed.

The relatively larger change was seen in the perceived balance of risks. Back in December, the risks around the GDP outlook were seen mostly as balanced, but now 18 out of 19 FOMC participants saw them as weighed to the downside (chart 1). This was reflected in Powell’s remarks as well, as he emphasized that the real economy remained solid both in terms of labour markets and consumer spending, but that the Fed remains mindful of the more cautious signals seen in soft sentiment indicators.

While Powell refrained from specifying how much the expectation of tariffs had influenced the inflation forecasts, he flagged that the ‘base case’ is still for tariffs to cause no persistent inflation. The Fed pays close attention to inflation expectations, but ‘most’ longer-term measures remain anchored near the target (with the Michigan survey as a notable ‘outlier’).

When asked about the possibility of a rate cut in May, Powell did not close the door, but mentioned several times that the Fed is not in a hurry to move. We still look for the next cut in June, followed by quarterly 25bp reductions until the terminal rate of 3.00-3.25% is reached in June of 2026. Our profile is close to market pricing for 2025, but  our terminal rate assumption remains below market’s expectations.

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