Fed holds rates in Mar-25 amidst rising macro uncertainty

20 Mar 2025 , 01:05 PM

STATUS QUO ON RATES ALONG EXPECTED LINES

After cutting the Fed rates by 100 bps between September 2024 and December 2024, some slowing in pace was expected. Amidst the rising macro uncertainty, the FOMC opted to maintain status quo in its March 18-19 Fed meeting. The rates were held in the range of 4.25% to 4.50%, the level the rates have been since the December 2024 FOMC meet. This decision was an outcome of rising macro uncertainty after Trump assumed presidency.

Trump has already imposed tariffs on Mexico, Canada, and additional tariffs on China. In April, he plans to extend reciprocal tariffs to EU nations and India. These measures are likely to raise the cost of global trade and impact growth and inflation in the US. It is amidst this uncertainty, that the FOMC members though it best to maintain status quo on rates.

WHAT WE READ FROM THE MARCH 2025 FOMC STATEMENT

It was the macro uncertainty under the new Trump regime that induced the Fed to maintain status quo on rates in March 2025. Here are key takeaways from the policy statement.

• While the Fed opted to maintain status quo on rates in the range of 4.25% to 4.50%, FOMC officials have stuck to their earlier forecast of 2 more rate cuts in year 2025.
• The tariffs have created complications for the Fed, since higher import costs could also escalate inflation in the US; something Fed has been battling for the last 3 years.
• The Fed members have also expressed concerns over the rate of growth in 2025 and 2026 and expect the tariff war to seriously hamper the rate of GDP growth. These GDP growth concerns are expected to drive rate cuts post June 2025.
• The economic projection updates for the quarter has some interesting changes. The March update (compared to the Dec-24 update) is expecting sharply lower growth, higher unemployment, higher core inflation; but no change in rates trajectory.
• The consensus forecast among the FOMC members is that rates would be cut by 50 bps to the range of 3.75%-4.00% by the end of 2025 and further by another 50 bps to the range of 3.25%-3.50% by the end of calendar year 2026, subjective to supportive data.
• Some estimates have changed sharply since December 2024. For example, the GDP growth projection for 2025 has been cut by 40 bps to 1.70%, while unemployment is expected 10 bps higher at 4.4% by end of 2025. However, the real uptick is expected in core inflation by 30 bps to 2.8% for 2025, due to impact of reciprocal tariffs.
• The macroeconomic concerns about lower growth and higher inflation stems from several steps taken by Trump. These include, punitive tariffs on imports, sharp cuts in government spending, government downsizing, and deporting of low-cost immigrants.
• Lastly, FOMC has decided to keep liquidity comfortable by cutting the pace of monthly reduction from $60 Billion to $40 Billion. Last year, this had been reduced from $90 Billion to $60 Billion, effective from June 2024. With the Fed balance sheet already down from $9.2 Trillion to $6.8 Trillion, Fed can afford this liquidity cushion.

While the vote to hold rates was unanimous, FOMC members Chris Waller, voted against the decision to reduce the pace of balance sheet reduction.

CME FEDWATCH PROJECTS 2 CUTS EACH IN 2025 AND 2026

The CME Fedwatch captures probabilities of rate moves at each upcoming Fed meet, based on implied probabilities of Fed Futures trading.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
May-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	16.0%	84.0%
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	10.6%	58.8%	30.7%
Jul-25	Nil	Nil	Nil	Nil	Nil	3.6%	27.0%	49.2%	20.2%
Sep-25	Nil	Nil	Nil	Nil	2.3%	18.7%	41.4%	30.4%	7.1%
Oct-25	Nil	Nil	Nil	0.8%	8.1%	26.7%	37.5%	22.2%	4.6%
Dec-25	Nil	Nil	0.4%	4.5%	17.5%	32.1%	29.8%	13.4%	2.3%
Jan-26	Nil	0.1%	1.1%	6.7%	19.9%	31.6%	27.0%	11.6%	1.9%
Jun-26	0.2%	1.3%	5.3%	14.5%	25.2%	27.7%	18.3%	6.6%	1.0%
Dec-26	1.5%	4.8%	12.1%	21.2%	25.3%	20.2%	10.6%	3.5%	0.8%

Data source: CME Fedwatch

For 2026, we have only considered January and then the two key meetings of June 2026 and December 2026. Let us focus on the two milestones of Dec-25 and Dec-26.

• As of December 2025, there is an 84.3% probability that rates would be cut by at least 50 bps. Anything beyond that looks unlikely at this juncture.
• Let us turn to December 2026. There is 85.1% probability of 1 more rate cut in 2026 and 64.9% probability of 2 more rate cuts in 2026. This is more conservative than FOMC.

While the FOMC has hinted at 2 rate cuts by end of 2025 and 2 more rate cuts by end of 2026, the CME Fedwatch is a tad more conservative. Apparently, there are concerns that the Trump induced inflation may not allow such an indulgence. Fed may have to compensat