Fed stands firm, markets cheer but risks loom

As widely expected, the Federal Reserve kept its benchmark rate steady at 4.25%-4.50% during its eagerly awaited FOMC meeting. However, the real shift came in the tone: the statement now emphasizes that “uncertainty around the economic outlook has increased”, replacing the previous wording of “economic outlook is uncertain.” This subtle yet crucial change reflects mounting concerns over economic stability.

In a notable policy tweak, the Fed announced that starting in April, it will slow the pace of balance sheet reduction by cutting the monthly redemption cap on Treasury securities from $25 billion to $5 billion.

While consensus still points to two rate cuts in 2025, a rising number of Fed officials are questioning this path: 8 members now expect no cuts or just one, doubling from December’s four. 2025 GDP growth forecast was revised down to 1.7% from 2.1%, with the 2026 outlook also trimmed to 1.8% from 2.0%. Core PCE inflation is now expected at 2.8% in 2025 (up from 2.5%), but remains at 2.2% in 2026, aligning with Powell’s “transitory price shock” stance.

Fed Chair Jerome Powell acknowledged that tariffs are playing a role in inflation, describing them as a “transitory” factor. However, he made it clear that the Fed is in no rush to adjust rates as uncertainty around the economy's outlook is "unusually elevated"

He emphasized that if inflation does not sustainably decline toward 2%, restrictive policies may stay in place longer while on the flip side, if the labor market weakens or inflation falls faster than expected, the Fed could move to cut rates sooner. Powell also downplayed stagflation fears, saying the Fed does not see a severe recession as likely despite some external warnings.

US President Trump in the meantime stated that The Fed would be much better off cutting rates as U.S. tariffs start to transition their way into the economy.

Despite the Fed’s more hawkish tone, markets rallied on Powell’s transitory inflation remark.

However, this optimism could be short-lived. If upcoming data suggests sticky inflation, markets may be forced to recalibrate expectations, triggering another selloff.