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Written by: Jordan Jackson
The Federal Open Market Committee (FOMC) voted to maintain the Federal funds rate at a target range of 4.25%-4.50% at its March meeting. The statement indicated a shift in sentiment regarding the outlook since January, noting that “uncertainty around the economic outlook has increased”. Moreover, the committee removed the language that risk to its inflation and employment goals were “roughly in balance”, suggesting members may now be more sensitive to slowing growth than price pressures.
Elsewhere, the committee announced it will slow the pace of balance sheet runoff, reducing the monthly redemption cap on US Treasury securities from $25bn to $5bn, while maintaining the $35bn cap on agency mortgage-backed securities.
Updates to the Summary of Economic Projections (SEP) signal rising near term stagflation risks:
- Growth was downgraded from 2.1% to 1.7% this year and adjusted modestly lower in 2026 and 2027.
- The unemployment rate was nudged higher by 0.1% to 4.4% in 2025.
- Both headline and core PCE were raised by 0.2% and 0.3% to 2.7% and 2.8%, respectively for 2025. Further out, forecasts were essentially unchanged suggesting tariffs will be a “transitory” inflation shock.
- No changes were made to the median interest rate forecast.
During the press conference, Chairman Powell acknowledged the uncertainty in Washington and that tariffs—those implemented and proposed—are expected to contribute to upward pressure on near term inflation but took some solace in that longer run inflation expectations have remained well anchored.
Interestingly, the bond market seems to agree. This Treasury curve has generally made a parallel shift lower with both the nominal US 2Y and 10Y Treasury yield declining 27 and 33bps, respectively year-to-date. However, the real yield component of the 2Y—a proxy for near term growth— has fallen by 87bps while the inflation component has risen by 60bps. At the long end, the inflation component of the nominal US 10Y has barely moved year -to-date (-3bps), while the real yield component has fallen by 30bps, accounting for essentially all the move in long term rates. Effectively, the bond market is pricing in a greater risk of near-term stagflation, followed by a longer term drag on economic growth.
For investors, the outlook for growth and inflation remains highly uncertain. Therefore, remaining well diversified across high quality bonds, reasonably priced stocks, international assets and alternatives seems most appropriate.
Bonds expect transitory near term inflation, followed by a longer term drag on growth
Year-to-date change in nominal yields, real yields and expected inflation
Source: Bloomberg, Federal Reserve, J.P. Morgan Asset Management.
Expected inflation calculated as the difference between the yield on a nominal Treasury and the yield on a TIPS with the same maturity.
Data are as of March 19, 2025.