There are some signs of recession, and the Fed officials must have noticed that the financial markets are in a state of panic. Therefore, the core contradiction of the March FOMC meeting is that policymakers need to balance "slowing growth" and "inflation stickiness" and whether to hedge against "Trump uncertainty" in advance.
If the meeting sends signals including "lower inflation tolerance + later rate cuts" and ignores the chaos brought about by Trump's fiscal and tariff policies, this will push down U.S. bonds, stocks and cryptocurrencies, and strengthen the dollar in the short term; (of course, I think the probability of getting all these hawkish elements together is very low)
On the contrary, if the Fed believes that the current inflation is driven by temporary factors (such as tariffs and supply chains), or believes that the risk of economic recession is greater than the risk of inflation, and therefore tolerates inflation temporarily higher than the 2% target, or triggers expectations of interest rate cuts in advance, it will be beneficial to risky assets.
In addition, if the Fed is too worried about economic growth, even if there is an expectation of easing monetary policy, it may cause short-term panic in the market and cause temporary or disorderly fluctuations.
The following are the specific points that need attention:
1. Interest rate decisions and policy stance
Whether to maintain interest rates unchanged:
All institutions unanimously expect the Fed to keep the federal funds rate target range at 4.25%-4.50%, continuing the "no rush to act" stance. There should be no surprises here. If there are surprises, just go long with your eyes closed.
Policy statement wording:
Pay attention to whether the statement adjusts the assessment of economic growth, inflation and risk balance (such as from "strong growth" to "moderate slowdown"), and whether the wording of "patiently waiting" is retained. Pay attention to whether officials downplay the rise in unemployment and still emphasize the tight labor market.
If the statement emphasizes the stubbornness of inflation, it may suppress risky assets; if it downplays the risk of inflation growth, it may boost the stock and currency markets.
2. Adjusted Economic Forecast (SEP)
Growth and Unemployment:
Wall Street expects Federal Reserve officials to slightly lower their GDP growth forecast for 2025 (from 2.1% to 2.0%), reflecting the drag from trade policy and slowing consumption, and the unemployment rate is expected to remain low (4.3%).
Inflation path:
Core PCE inflation was last forecast at 2.5%, which could be revised upward if officials take into account tariff pass-through and wage stickiness, which is a bad signal.
In addition, we also need to consider whether long-term inflation expectations are "unanchored" (such as the latest warning from the University of Michigan that inflation expectations have jumped to 3.9%).
Market impact: If the downward revision of GDP growth rate and the upward revision of core PCE inflation forecast come true, it means that expectations of stagflation are heating up, which may suppress risky assets and be good for gold.
3. Dot Plot’s signal of rate cut
The median number of interest rate cuts in 2025: The current market expectation is two (25bp each), and it remains to be seen whether it will be maintained, reduced (once) or increased (three times).
Long-run neutral interest rate (r*): If trade policy is seen to increase supply-side costs, this could lead to an upward revision of r*, suggesting less room for rate cuts.
Degree of disagreement among members: Pay attention to the degree of dispersion of the dot plot distribution. If the forecast for 2025 is concentrated on 1-3 interest rate cuts, the uncertainty of the policy path is relatively high.
Market Impact:
The signal of stagflation has already appeared, so the core of this dot plot is to verify the Federal Reserve’s tolerance for the risk of “stagflation”.
If the dot plot suggests fewer rate cuts (1), short-term yields will jump, which is bearish for risky assets; if there are more rate cuts (3), risk appetite will be boosted.
If the dot plot shows more rate cuts, it is necessary to verify whether the core PCE forecast is adjusted down at the same time (original forecast 2.8%). Contradictory signals (more rate cuts + higher inflation) will cause market confusion.
4. Adjustment plan for quantitative tightening (QT)
The pace of balance sheet reduction:
Adjustments to QT may include slowing the pace of balance sheet reduction or suspending the reduction of MBS holdings (currently reducing by US$35 billion per month).
Reinvestment strategy:
Pay attention to whether the MBS repayment funds are reinvested in Treasury bonds (neutral strategy) or in short-term notes (Bills) in proportion, which may exacerbate the short-end distortion, especially since the debt ceiling has led to a reduction in bill issuance. If the reinvestment is biased towards neutral or long bonds, it may lower the long-end yield and ease the term premium pressure, which will be an additional positive.
Market Impact:
This may be the biggest potential positive of this meeting. If the QT end timetable is clarified or expectations of market liquidity pressure are alleviated, it may be beneficial to the rebound of risky assets.
5. Trade policy and inflation risk
Tariff impact assessment:
Whether the Federal Reserve mentioned the two-way impact of trade policy uncertainty on growth and inflation in its statement or press conference (some institutions expect tariffs may push up core PCE by 0.5pp).
Does it hint at concerns about the risk of "stagflation" (the market has priced in a recession, but the Fed is more concerned about inflation).
If inflation expectations get out of control, will a hawkish signal of “raising interest rates if necessary” be released (low probability, but need to be vigilant).
Market Impact:
If the Fed emphasizes the stickiness of inflation, the upward trend of real interest rates will suppress gold; if it admits stagflation, risky assets will be sold off. If inflation is controllable, wait and see.
6. Debt Ceiling and Fiscal Policy Risks
Government shutdown risk:
The debt ceiling deadlock remains unresolved. We will focus on whether the Federal Reserve will hint at liquidity support measures in advance (such as adjusting the SRF tool), which would be good news.
Fiscal drag:
Whether the effects of government spending cuts on economic growth are incorporated into the SEP forecast (e.g., federal layoffs drag on employment).
Market Impact:
The market impact here may be a bit tricky. Generally speaking, if the Fed is very worried about the chaos in the Treasury market and the pessimistic outlook for economic growth, the market may panic and sell at the first moment, and then the attention may return to the Fed's expectations of money easing. Therefore, if this happens, the market may not find a direction in the short term and may fluctuate greatly and disorderly.
