Economic Uncertainty Keeps Fed on Hold

On March 19, 2025, the Federal Reserve announced today that it will maintain the target range for the federal funds rate at 4.25% to 4.50%, keeping rates unchanged for the third consecutive meeting since December. This decision was widely anticipated by the market and comes as economic uncertainty has increased, particularly due to the recent introduction of new tariffs. Chair Powell noted that while economic activity continues to expand at a solid pace, risks to both sides of its dual mandate—maximum employment and price stability—have become more pronounced.

Source: Trading Economics

In addition to holding rates steady, the Fed announced it will slow the pace at which it reduces its holdings of U.S. government bonds. Starting in April, the monthly cap on maturing Treasury securities will be lowered from $25 billion to $5 billion. This means the Fed will allow fewer bonds to roll off its balance sheet each month, which helps ease upward pressure on interest rates and supports stability in financial markets. The monthly cap on agency debt and mortgage-backed securities will remain unchanged at $35 billion. This adjustment reflects a more cautious approach as the Fed navigates growing economic uncertainty.

The U.S. economy has demonstrated resilience in recent months. Inflation slowed to 2.8% in February, down from 3.0% in January, continuing its gradual return toward the Fed’s 2% target. Meanwhile, the unemployment rate increased slightly to 4.1% in February from 4.0% the previous month. While this marks a modest increase, historically, a 4.1% unemployment rate remains low by long-term standards and suggests that labour market conditions are still solid. The Fed acknowledged this stability, reiterating its confidence in the overall health of the labor market.

12-month percent change in CPI - Source: Bureau of Labor Statistics

The introduction of new tariffs has added complexity to the economic outlook. By increasing the cost of imported goods, tariffs raise expenses for U.S. businesses that rely on foreign materials and components, which can lead to higher prices for consumers. This creates the risk of renewed inflationary pressures while also slowing economic growth as companies face tighter margins and potentially scale back investment or hiring. The Fed acknowledged this growing uncertainty in its statement, emphasizing that it is closely monitoring how these trade measures may impact both inflation and employment in the months ahead.

Currently, market expectations point to the first rate cut happening in June, with Bloomberg’s World Interest Rate Probability (WIRP) function assigning a 60.5% chance of a move at that meeting. This reflects growing anticipation that the Fed may need to ease policy as economic risks build, including the potential impact of tariffs and signs of softening momentum in growth and inflation. At the same time, the growing gap between the U.S. federal funds rate and the Bank of Canada’s overnight rate continues to put downward pressure on the Canadian dollar. This divergence remains an important trend to monitor, as it may influence currency markets and cross-border investment decisions in the months ahead.

World Interest Rate Probability - Source: Bloomberg

March 19th, 2025

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