Fed Meeting Preview: Will Powell Deliver a Dovish Shift or Disappoint Markets?

The Federal Reserve begins its two-day policy meeting this week, with markets widely expecting no change to the current 4.25-4.50% target range. However, uncertainty remains over the Fed’s next move, making this meeting a key moment for investors. Market participants will closely analyze the Fed’s statement, its updated Summary of Economic Projections (SEP), and the dot plot for insights into future rate policy. Thirty minutes after the decision, Chair Jerome Powell will hold a press conference, where every word will be scrutinized for any shift in tone. While some investors are hoping for a more dovish stance—the so-called “Fed Put”—the economic landscape and recent Fed commentary suggest Powell may not deliver the accommodative signals that markets are looking for.

Although economic data has softened, it remains relatively stable, giving the Fed little immediate reason to shift toward easing. Uncertainty surrounding fiscal policy, particularly the impact of new tariffs, has also kept the Fed cautious. Policymakers have acknowledged that tariffs could be inflationary, reinforcing the need to maintain a higher-for-longer stance. Meanwhile, the Trump administration has signaled a willingness to tolerate short-term economic weakness and market volatility in pursuit of broader structural reforms, ruling out any form of a “Trump Put” for markets. While a dovish tilt from Powell would likely be welcomed by investors, the data and policy outlook do not strongly support such a move at this stage, raising the risk that markets could be disappointed by the Fed’s tone.

Highlights from Powell's March 7 Speech

Federal Reserve Chair Jerome Powell spoke on March 7, 2025, offering an update on the economy, inflation, and monetary policy. He noted that while uncertainty remains high, the economy is in solid shape, supported by a strong labor market and moderating inflation.

Economic growth continued at a 2.3% annualized rate in the fourth quarter of 2024, largely driven by consumer spending. However, Powell acknowledged signs of a potential slowdown, with surveys showing rising uncertainty among businesses and households.

The labor market remains stable, with 151,000 jobs added in February and an average of 191,000 jobs per month over the last six months. The unemployment rate is 4.1%, staying within a narrow range over the past year. Wage growth has moderated, and Powell said the labor market is not a primary source of inflationary pressure.

Inflation has declined significantly from its mid-2022 highs. The most recent personal consumption expenditures (PCE) inflation reading showed a 2.5% increase year-over-year, with core PCE, excluding food and energy, rising 2.6%. Powell said progress on inflation has been uneven, with some categories, such as housing services, remaining elevated. He also noted that inflation expectations have inched up, partially due to tariff concerns.

On monetary policy, Powell reiterated that the Federal Reserve is in no rush to change course. If inflation does not return to 2%, rates could stay elevated. However, if the labor market weakens or inflation falls faster than expected, the Fed is prepared to adjust policy.

Powell also confirmed that the Fed’s ongoing monetary policy framework review will conclude by late summer, with the 2% inflation target remaining unchanged. His remarks suggest a cautious but flexible approach as economic conditions evolve.

Economic data has been uneven leading up to the Fed meeting. While sentiment has turned increasingly negative, it has not been fully supported by hard data. This contrast was evident in last week's inflation figures, which did not align with more pessimistic sentiment surveys. It remains to be seen how Powell and the Fed will address these discrepancies, but it is unlikely that the latest data has significantly altered Powell’s stance from his recent comments.

Highlights from the January 31 Statement

As the Federal Reserve prepares to release its latest policy statement, markets will be closely analyzing any subtle adjustments to the language used in its previous statement. Even minor tweaks can signal shifts in the Fed’s outlook on the economy, inflation, or its approach to monetary policy. Investors will be particularly focused on whether the Fed acknowledges recent signs of economic slowing, provides any new guidance on rate cuts, or adjusts its stance on balance sheet reduction.

Key Takeaways from the Last Fed Statement:

- Economic Growth: The Fed previously noted that economic activity was expanding at a solid pace and that the labor market remained strong and stable. Any softening in this language could indicate increased concern about slowing growth.

- Inflation: The statement acknowledged that inflation remains somewhat elevated, though policymakers remain committed to achieving the 2% target. Given recent inflation prints and ongoing tariff concerns, markets will watch for any change in the Fed’s tone regarding inflationary pressures.

- Policy Outlook: The Fed reiterated its data-dependent approach, stating that it will carefully assess incoming data before making any adjustments to the federal funds rate. With expectations for rate cuts later this year, investors will look for any shift in the Fed’s language that might hint at timing or pace of future easing.

- Balance Sheet Reduction: The Fed confirmed that it would continue reducing its holdings of Treasury securities and mortgage-backed assets. Any commentary about slowing or adjusting the pace of this process could impact market sentiment, particularly in fixed-income markets.

With uncertainty surrounding inflation trends and economic growth, any modifications to these key areas will help shape expectations for the Fed’s next steps and the broader market response.

Watch the Summary of Economic Projections

The Federal Reserve’s March meeting carries significant weight as it will update its Summary of Economic Projections (SEP), providing insight into the expected path of economic growth, inflation, and interest rates. Investors are particularly concerned that the Fed may lower its GDP forecast while raising its inflation expectations, a combination that could fuel fears of a stagflationary environment.

In its December projections, the Fed anticipated GDP growth of 2.1% for 2025, but recent economic data suggests a potential downgrade. The latest updates from the Atlanta Fed’s GDPNow model indicate that first-quarter GDP is now tracking at -2.4%, a stark decline from the 2.9% estimate at the start of the year. Personal consumption, a key driver of economic growth, has also weakened considerably, falling to a mere 0.3% contribution to GDP. Given this slowdown, the Fed is likely to lower its 2025 growth forecast, which could signal weaker corporate earnings and a less resilient economy.

The labor market remains relatively stable, with unemployment at 4.1% in February and jobless claims showing continued strength. However, early warning signs, such as rising job cuts reported by Challenger, Gray & Christmas, suggest potential softness ahead. The Fed is expected to revise its unemployment projection slightly higher to 4.4% for 2025, reflecting the weaker economic outlook.

Inflation remains a key concern. While the February Consumer Price Index (CPI) report indicated continued disinflation, the Fed has highlighted risks from trade policy, particularly new tariffs, which could push inflation higher. Inflation expectations have risen, with the University of Michigan survey showing that consumers expect inflation to reach 4.9% within a year. Given these factors, the Fed is likely to increase its 2025 core PCE inflation forecast from 2.5%, reinforcing the narrative of persistent inflationary pressures.

The projected path of interest rates is another critical focus. In December, the Fed projected the federal funds rate at 3.4% for 2025, implying three rate cuts. However, expectations have since shifted, with markets now pricing in a higher 3.9% rate, aligning with two cuts instead of three. The Fed is unlikely to signal further rate cuts if it also raises its inflation outlook, meaning it will likely keep the 3.9% projection or even hint at a higher rate if inflation risks escalate.

Taken together, the expected adjustments in the SEP—lower GDP growth, higher unemployment, and rising inflation forecasts—point to a more challenging economic landscape. If these projections materialize, they could confirm stagflationary fears, a scenario that would weigh heavily on equities. Investors will be closely watching the Fed’s language and any changes to its policy outlook, particularly in light of ongoing trade policy uncertainty and shifting inflation expectations. The March SEP update will serve as a crucial indicator of how the Fed navigates these complex economic conditions.

Watching for QT Changes

The Federal Reserve’s stance on quantitative tightening is emerging as a potential policy shift that many investors have yet to fully anticipate. While QT was not directly addressed in the Fed’s most recent policy statement, Chair Powell hinted at a possible adjustment during his press conference. This was later reinforced in the FOMC minutes, which revealed that QT was a significant topic of discussion among committee members.

At its current pace, continued QT would push bank reserves down to approximately $3 trillion by mid-2025, which equates to about 10 percent of GDP—a level the Fed may prefer not to breach. During the previous QT cycle, reserves fell to 7.5 percent of GDP, causing liquidity issues in financial markets. While there is debate about whether 9 percent of GDP could be an acceptable floor, the Fed appears to be considering a wind-down of QT as it approaches single-digit territory.

For Treasuries, this potential shift is significant. If QT ends, the Fed would return as a steady buyer of Treasuries, purchasing $50 billion to $100 billion per month to maintain its balance sheet. The FOMC has already indicated that reinvestments will follow the capital distribution of outstanding debt, meaning Fed purchases would be spread across the yield curve.

While the end of QT would be supportive for bond markets, it is not expected to be a decisive factor for yields. Instead, it would normalize the Fed’s role as a constant market participant, managing reserve obligations rather than actively tightening liquidity. Investors will be closely watching Powell’s tone and any SEP adjustments, as well as the Fed’s evolving stance on QT, which could add a new layer of complexity to market expectations.

Conclusion

Investors will be closely watching the Federal Reserve’s upcoming policy meeting for any signals of a shift in monetary strategy, particularly in response to growing concerns over economic softness. While economic data has weakened, the Fed has remained cautious due to uncertainty around fiscal policy and the inflationary impact of tariffs. Market participants are hoping the central bank will acknowledge these risks, but policymakers may be hesitant to commit to rate cuts given lingering inflation pressures. The Summary of Economic Projections (SEP) update could reinforce concerns of stagflation if the Fed lowers growth forecasts while raising inflation expectations.

Another key area of focus will be the Fed’s approach to quantitative tightening, which was not explicitly mentioned in the last statement but was later revealed to be a major discussion point in the FOMC minutes. As bank reserves approach levels that could cause liquidity issues, the Fed may be considering a wind-down of QT, which would mark a notable policy shift. If the Fed signals an end to QT, it would reintroduce the central bank as a consistent buyer of Treasuries, influencing bond markets. However, this potential change may be overshadowed by concerns about inflation and rate policy, leaving investors uncertain about the Fed’s next steps.