The Federal Reserve left interest rates unchanged on March 19. However, multiple Fed interest rate cuts are likely this year. While the odds are low for a Fed rate cut on May 7, the odds are very high for an interest rate cut on June 18. Elevated levels of consumer inflation combined with a solid labor market imply that the Fed does not need to urgently cut interest rates. However, the pace and timing of future Fed rate cuts are unclear. Consumer and business confidence have fallen due to tariff uncertainty and trade risks. Based on the March 2025 Federal Open Market Committee forecasts, two interest rate cuts are likely this year, which was unchanged from the December 2024 FOMC forecasts. As a major wildcard for the Fed, the Atlanta Fed GDPNow reflects a potential for Q1 2025 gross domestic product to contract. If that happens, the potential for more Fed rate cuts is likely to increase significantly.
The Fed Left Interest Rates Unchanged In March
The Fed left the federal funds rate unchanged in a range between 4.25% and 4.5% on March 19, which was widely expected. In fact, the CME FedWatch Tool reflected that the odds the Fed would leave interest rates unchanged at 99% as of 8:41 a.m. ET on March 13. The odds of a rate cut were effectively zero at only 1%.
The March FOMC interest rate decision was informed by the Fed’s dual mandate to foster full employment and keep prices low and stable.
The FOMC noted in the March 2025 statement, “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”
The job market is “solid” and close to full employment, with a low unemployment rate of only 4.1% in February and over 7.7 million open jobs in January.
While payrolls are positive but have slowed, inflation remains “somewhat elevated,” with year-on-year Total CPI up 2.8% and Core CPI up 3.1% in February. The latest PCE inflation data for January showed U.S. PCE up 2.5% and Core PCE up 2.6%.
All of these key year-on-year consumer inflation rates are above the Fed’s 2% target, and in the March FOMC projections, the Fed is forecasting a longer period of above-target PCE and PCE Core inflation.
Fed Interest Rate Projections Remained Unchanged
The March 2025 median FOMC member projections conveyed that Fed members expect the same number of rate cuts in the years ahead as they previously forecasted in December 2024.
The unchanged FOMC member forecasts of median future interest rates reflect expectations that the federal funds rate will be 3.9% at the end of 2025, 3.4% at the end of 2026, and 3.1% at the end of 2027.
While the March 2025 FOMC interest rate forecasts were unchanged, the FOMC unemployment rate, GDP growth, and inflation forecasts all worsened.
The FOMC median Q4 2025 unemployment rate was raised modestly to 4.4% from 4.3%. Meanwhile, the median year-on-year real GDP forecast for Q4 2025 was lowered to 1.7% from 2.1%.
The median Q4 2025 year-on-year PCE and Core PCE inflation expectations were raised, with PCE at 2.7% and Core PCE at 2.8%. In December, both Q4 2025 PCE and Core PCE were forecasted to be 2.5%.
Looking ahead, Prestige Economics expects year-on-year Total CPI and Total PCE to decelerate in 2025. However, Core CPI and Core PCE measures of inflation are likely to remain elevated and above the Fed’s 2% target through most, if not all, of 2025.
More interest rate cuts are coming, but only if inflation rates keep cooling.
One wild card in the outlook that could drastically impact the future path of Fed policy would be rapidly slowing growth.
Tariff and trade concerns have weighed on consumer and business confidence, lowering the Atlanta Fed’s GDPNow reading to reflect a likely -1.8% Q1 2025 GDP growth rate based on data available through March 18.
Fed Chair Gives Cautious Press Conference Remarks
With no change in Fed policy and no major changes in FOMC member forecasts for future interest rates, a great deal of attention was paid to Fed Chair Jerome Powell’s comments in the press conference that followed the FOMC decision.
However, Powell’s press conference did not answer a lot of questions. Powell struck a cautious tone in his remarks, underscoring the Fed’s data dependence. He also reiterated that the future of Fed policy is not on any set course and that the impacts of varied trade uncertainty and tariff risks are not precise.
In the press conference, there were also a number of questions about the Trump administration’s policies. However, Powell adroitly sidestepped these questions as usual.
Looking Ahead To The Future Of Fed Policy
The outlook for future interest rates is uncertain and it will depend greatly on the future of growth, the labor market, and inflation. If significant progress is made on inflation, the Fed could consider rate cuts on either May 7 or June 18.
According to the CME FedWatch Tool, the odds of a Fed rate cut by 0.25% at the May 7 meeting were 14.9% as of 5:37 p.m. ET on March 20. Meanwhile, the chance of no interest rate change on May 7 was 85.1%.
The odds for a June 18 Fed rate cut are significantly higher, with the CME FedWatch Tool reflecting the odds of a 0.25% rate cut at 62.5% and the odds of a 0.50% rate cut at 10.1% as of 5:37 p.m. ET on March 20. Meanwhile, the chance of no interest rate change on June 18 was 27.4%.
Future Fed interest rate cuts are likely in 2025. However, inflation remains the potential stumbling block that could hinder the Fed from cutting interest rates, especially in the face of a strong labor market.
Market Implications Of Future Fed Policy
Financial market moves will hinge closely on Fed policy. Interest rate changes impact foreign exchange rates, bond markets, equities, private company business valuations, and industrial commodity prices.
If the Fed should cut interest rates sooner or more than markets are expecting, the dollar would likely fall while bond, equity, and industrial commodity prices get a boost. However, if the Fed should hold off on interest rates for some time, the greenback could strengthen against most major currencies, while equity, bond, and industrial commodity prices likely come under pressure.
As the Fed seeks to chart an uncertain path forward, the shifting dynamics of elevated inflation, falling consumer and business confidence, downside risks to growth, and a solid growth rate are presenting a shifting landscape that will be difficult to maneuver in a way the both prevents recession and hinders an acceleration in consumer inflation.
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