The Federal Reserve continues to hold steady, slowing down the balance sheet reduction starting in April, with expectations of fewer rate cuts by officials this year, while lowering economic forecasts and raising inflation expectations

Key Points:

The Federal Reserve paused interest rate cuts for two consecutive meetings, in line with market expectations.

The statement removed the wording about the balance of risks to employment and inflation targets, stating that uncertainty in the economic outlook has increased.

The method for slowing the balance sheet reduction is to lower the monthly redemption cap for U.S. Treasury bonds from $25 billion to $5 billion, while the redemption cap for agency MBS remains unchanged.

There was one dissenting vote in this decision; Federal Reserve Governor Christopher Waller wanted to maintain the current pace of balance sheet reduction.

The median interest rate forecast remains unchanged, still expecting two cuts of 25 basis points each this year and next.

In the dot plot, the number of officials expecting no rate cuts this year increased from one to four, while those expecting two cuts decreased by one to nine, and those expecting three cuts decreased by one to two.

The GDP growth forecast for this year and the next three years has been lowered, with this year's growth rate revised down from 2.1% to 1.7%, a slight increase in this year's unemployment rate to 4.4%, and an upward revision of the PCE inflation expectations for this year and next, with the core PCE inflation expectation rising the most from 2.5% to 2.8%.

The "New Federal Reserve News Agency": The Fed's higher inflation and unemployment rate expectations this year reflect the potential impact of tariffs.

The impact of the Trump administration's tariff policy is beginning to show, and the Federal Reserve has chosen to remain on hold, but the adjustments to the outlook for U.S. economic growth and inflation reflect the Fed's vigilance against the risk of stagflation.

On March 20, Wednesday, Eastern Time, the Federal Reserve announced after the FOMC meeting that the target range for the federal funds rate remains unchanged at 4.25% to 4.5%. This marks the second consecutive monetary policy meeting where the Fed decided to pause interest rate cuts. The Fed raised rates by a total of 525 basis points from March 2022 to July last year, and cut rates by a total of 100 basis points in three consecutive meetings starting in September last year.

At the same time, the Federal Reserve announced that it would slow the pace of balance sheet reduction starting next month. This is the first adjustment to the balance sheet reduction since June of last year. From June 2022 to the end of last year, the Fed had reduced its balance sheet by nearly $2 trillion.

This pause in interest rate cuts was fully anticipated by the market. Due to increasing concerns about economic growth, the market began to expect three rate cuts within this year, possibly starting in June. By the close on Tuesday, CME tools indicated that the futures market expected a 99% probability that the Fed would keep rates unchanged this week, with over an 84% probability of no rate cuts in May, and nearly a 75% probability of a rate cut in June.

The dot plot released after this meeting shows that Fed officials, like at the end of last year, still expect two rate cuts this year, but these officials have lowered their GDP growth expectations and raised their inflation expectations, reflecting their predictions about the impact of Trump's policies on the economy and inflation.

Nick Timiraos, a senior reporter known as the "New Federal Reserve News Agency," pointed out on Tuesday that Fed Chairman Jerome Powell faces the threat of stagflation, as rising tariffs from the trade war could push up prices while economic growth may stagnate or slow down After the Federal Reserve's decision was announced this Wednesday, Timiraos commented that the Fed has extended the pause on interest rate cuts, viewing the economic outlook as dimmer than before. The Fed officials expect this year's inflation and unemployment rates to be higher than previously anticipated, reflecting the potential impact of tariffs. He pointed out that almost all Fed officials expect downside risks to economic growth and believe there are upside risks to unemployment and inflation expectations.

Increased Uncertainty in Economic Outlook Slows Balance Sheet Reduction by Lowering U.S. Treasury Redemption Cap; Governor Waller Votes Against

Compared to the last FOMC statement at the end of January, this Fed decision statement has three major changes. First, it no longer reiterates that “the risks to achieving employment and inflation goals are broadly balanced.”

This statement removes that phrase and changes the wording from “economic outlook is uncertain” to:

“Uncertainty related to the economic outlook has increased.”

Second, after last June, it further slows the pace of quantitative tightening (QT) actions.

In addition to reiterating its commitment to continue reducing its holdings of U.S. Treasuries, agency debt, and agency mortgage-backed securities (MBS), the Fed's statement also added two sentences:

“Starting in April, the (FOMC) committee will slow the pace of reducing its securities holdings by lowering the monthly redemption cap for U.S. Treasuries from $25 billion to $5 billion. The committee will keep the monthly redemption cap for agency debt and agency MBS unchanged at $35 billion.”

The final difference is that this post-meeting decision did not receive unanimous support from the FOMC voting members, with one dissenting vote. The dissenting vote was cast by Federal Reserve Governor Waller (Christopher Waller), who supports continuing the pause on interest rate cuts but does not advocate slowing the balance sheet reduction, preferring to maintain the current pace of reduction.

The other contents of this statement are identical to those at the end of January, reiterating for the third consecutive time that when considering the “degree and timing of any new adjustments to the policy rate,” the FOMC will “carefully assess future data, evolving outlooks, and risk balances.”

This statement continues to incorporate the increased focus on employment goals added in the September statement last year, including stating that the FOMC is “firmly committed to supporting maximum employment” and that the FOMC “is attentive to the two-sided risks facing its dual mandate.”

The following red text highlights the deletions and additions in this decision statement compared to the last one.

The Dot Plot Shows the Number of Officials Expecting No Rate Cuts This Year Increases to Four, While Those Expecting Two Rate Cuts Decreases to Nine

The median value of the interest rate forecasts released after the meeting shows that the Fed officials' rate outlook is completely unchanged from December, with no adjustments.

The specific median forecasts are as follows:

The federal funds rate at the end of 2025 is 3.9%, unchanged from December's expectations.

The federal funds rate at the end of 2026 is 3.4%, unchanged from December's expectations

By the end of 2027, the federal funds rate is expected to be 3.1%, unchanged from December's expectations.

The longer-term federal funds rate is expected to be 3.0%, unchanged from December's expectations.

Based on this, Federal Reserve officials currently expect two rate cuts of 25 basis points this year, with the same rate cut expected next year.

The chart below shows the changes in the rate expectations of Federal Reserve officials as reflected in the dot plot, with yellow dots representing the March dot plot expectations and gray dots representing the previous December dot plot expectations.

Although the overall forecast for rate cuts this year and next remains unchanged, the dot plot indicates that those within the Federal Reserve who were previously leaning towards a more dovish stance have now shifted to a more hawkish view, as the number of officials expecting at least two rate cuts this year has decreased, while the number expecting no cuts or only one cut has increased.

According to the updated dot plot released after the meeting on Wednesday, compared to the last dot plot published by the Federal Reserve in December, among the 19 officials providing forecasts:

This time, four officials expect no rate cuts this year, while last time there was only one;

This time, four officials expect one rate cut this year, while last time there were three;

This time, nine officials expect two rate cuts this year, while last time there were ten;

This time, only two officials expect three rate cuts this year, while last time there were three;

This time, no officials expect four rate cuts this year, while last time there was one.

Downgrade GDP growth expectations for the next three years, upgrade PCE and core PCE inflation expectations for this year and next

The economic outlook released after the meeting shows that Federal Reserve officials have downgraded GDP growth expectations for the next three years, with the largest downgrade occurring this year. They have slightly upgraded the unemployment rate expectations for this year, as well as the PCE inflation expectations for this year and next, and the core PCE inflation expectations for this year, with the largest upgrade in core PCE inflation expectations.

Specific forecasts are as follows:

• The expected GDP growth rate for 2025 is 1.7%, down 0.4 percentage points from the December expected growth rate of 2.1%. The expected growth rate for 2026 is 1.8%, down from the December expectation of 2.0%. The expected growth rate for 2027 is 1.8%, down from the December expectation of 1.9%. The longer-term expected growth rate is 1.8%, unchanged from December expectations.
• The expected unemployment rate for 2025 is 4.4%, up 0.1 percentage points from the December expectation of 4.3%. The expected rates for 2026 and 2027 are both 4.3%, unchanged from the December expectation of 4.3%. The longer-term unemployment rate expectation is 4.2%, also unchanged from December expectations
• The expected PCE inflation rate for 2025 is 2.7%, an increase of 0.2 percentage points from the December expectation of 2.5%. The expectation for 2026 is 2.2%, up from the December expectation of 2.1%. The expectations for 2027 and the longer term remain at 2.0%, unchanged from the December expectations.
• The expected core PCE for 2025 is 2.8%, an increase of 0.3 percentage points from the December expectation of 2.5%. The expectation for 2026 is 2.2%, and for 2027 it is 2.0%, both unchanged from their respective December expectations.

It is worth mentioning that the economic outlook reveals that some Federal Reserve officials are extremely pessimistic about the economic growth prospects for the next two years, with the lowest GDP growth expectations for 2026 and 2027 being only 0.6%.