1. Maintain the benchmark interest rate unchanged
The Federal Reserve keeps the target range for the federal funds rate at 4.25%-4.5%, in line with market expectations. This is the second consecutive pause in rate adjustments following the start of the rate cut cycle in September 2024, reflecting a cautious attitude towards current economic uncertainties.
2. Slow down the pace of balance sheet reduction (QT Taper)
Starting April 1, the Fed will lower the monthly redemption cap on Treasury bonds from $25 billion to $5 billion, while keeping the balance sheet reduction cap for agency debt and mortgage-backed securities (MBS) unchanged at $35 billion. This adjustment is viewed as a 'technical operation' aimed at addressing debt ceiling and liquidity issues in the financial markets, rather than a change in monetary policy stance. Governor Christopher Waller voted against this, advocating for the original pace of balance sheet reduction.
3. Statement wording adjustments and economic outlook
Remove risk balance statement: The statement removed the wording 'the risks to achieving employment and inflation targets are roughly balanced' and added 'the uncertainty of the economic outlook has increased', reflecting heightened attention to trade policies, inflation paths, and external environments.
Economic forecast adjustments: Downgraded the GDP growth forecast for 2025 to 1.7% (previously 1.8%), raised the inflation forecast to 2.7% (core PCE inflation forecast at 2.8%), and slightly adjusted the unemployment rate forecast to 4.4%.
4. Policy path and interest rate cut expectations
There may still be two interest rate cuts this year: Although currently remaining steady, the Fed's dot plot shows that officials still expect two rate cuts in 2025 (with the federal funds rate dropping to 3.9% by the end of the year) and another two cuts in 2026 to 3.4%.
Data-dependent guidance: Powell emphasized that policy adjustments will be based on 'new incoming data', particularly the impact of tariff policies on inflation and the economy, as well as changes in the labor market.
5. Market reaction and interpretation
After the meeting results were announced, U.S. Treasury yields fell on the short end, U.S. stocks briefly surged before retreating, and the dollar's gains narrowed. The overall market interpretation was dovish, believing that slowing down the balance sheet reduction signals a move to avoid excessive tightening, but Powell downplayed its direct impact on monetary policy stance.
Summary
The core of this meeting is to balance inflation pressures with economic uncertainties, by slowing down the balance sheet reduction to release liquidity buffers while maintaining stable interest rates to observe the comprehensive effects of Trump’s policies (such as tariffs and immigration). Future policy paths remain highly data-dependent, especially on the trend of falling inflation and the evolution of external risks.
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