Don’t Expect a “Fed Put” and Watch the SEP — Evening Brief – 03.18.25

Investors are gearing up to dissect Wednesday’s Federal Reserve press conference, where Chair Jay Powell will likely drop hints about how they’re weighing inflation risks and economic activity, especially tied to the labor market. With consumer inflation cooling in February but tariffs threatening to reignite price pressures, all eyes will be on Powell’s tone—will he sound dovish, hawkish, or stuck in neutral?

“Anticipation is growing for a ‘Fed Put’ to offer relief to investors. However, in our opinion, those looking to the FOMC for reassurance during the meeting are likely to be let down,” Michael Underhill, CIO of Capital Innovations, shared with Connect.

The Fed’s updated Summary of Economic Projections (SEP), released alongside the rate decision, will also be a goldmine, revealing how the central bank’s tweaking its outlook on growth, unemployment, and inflation considering trade policy chaos and a softening jobs picture.

The last SEP in December 2024 laid out a median forecast of two quarter-point rate cuts for 2025. Alongside that, the Fed pegged core PCE inflation at 2.5% for the 12 months ending December 2025, with the unemployment rate ticking up to 4.3% and real GDP growth clocking in at 2.1%.

“The March FOMC meeting is supposed to be a non-event with the Fed in wait-and-see mode,” Evercore ISI VC Krishna Guha wrote in a note to clients. “But it looks to us like a tricky meeting with more than usual risk to markets.”

Inflation data showed progress in February, which could likely give the Federal Reserve breathing room to hold the federal funds target range steady on Wednesday, signaling a cautious stance as it balances inflation control with economic growth.

Guha separates a “good news cut”—where the Fed lowers rates due to easing inflation—from a “bad news cut,” triggered by a weakening economy. The chances of a good news cut are fading, while the odds of a “bad news cut” keep growing, he noted.

But that February data is already a relic. Rapidly escalating tariffs under President Trump’s trade war are reshaping the outlook. Economists warn these levies could add 0.5 to 1 percentage point to core inflation by late 2025, pushing it toward 3% or higher. Goldman Sachs, for instance, now projects core PCE inflation at 3% by December, up from a mid-2% forecast. Meanwhile, the Fed’s preferred gauge, PCE, might not reflect February’s calm for long.

Uncertainty is the real kicker. The Fed’s sidelined by tariff unpredictability—will they stick, expand, or spark retaliation? Consumer sentiment fell sharply in March to a 2½-year low (University of Michigan’s index at 57.9), with inflation expectations spiking to 1993 levels. That’s a red flag for a central bank obsessed with anchoring expectations to avoid a self-fulfilling price spiral. Fed officials like Susan Collins and John Williams have flagged these risks, suggesting patience over hasty interest rate cuts.

So, while February’s slowdown buys the Fed flexibility on Wednesday, the tariff storm clouds mean policy is in flux. They might hold at 4.25% to 4.50%—restrictive enough to lean against inflation—while signaling openness to adjust if trade wars derail the 2% inflation goal. Beyond March, it’s a coin toss: tighter policy if inflation expectations unmoor, or cuts if growth buckles under the weight of tariffs.

Fed funds futures signal near certainty—99% odds—that the central bank will hold its target rate steady during Wednesday’s announcement. Looking ahead to the May 7 FOMC meeting, the market pegs the chance of rates staying put at about 79%. It hinges on incoming data—CPI, PCE, or producer prices—and whether tariff policies, like the looming 25% on Canada and Mexico or the active 10% on China, shift or intensify in the intervening weeks.