Fed Holds Rates Steady, Signals Two Cuts Amid Stagflation Risk

The Federal Reserve kept interest rates unchanged at its March meeting, holding the federal funds rate at 4.25%-4.5% as widely expected. The decision comes amid ongoing inflation concerns and slowing economic growth.

Meanwhile, the Fed signaled the possibility of two rate cuts later this year. However, Chair Jerome Powell emphasized a cautious approach, stating that policymakers need greater confidence that inflation is on a sustainable path toward the 2% target before making any cuts.

He reiterated that rate cuts would only occur once there is clearer evidence of inflation easing, adding that the committee is “not in any hurry” to change rates. Despite this, the tone was slightly more dovish compared to the previous meeting.

Economic Projections: Mixed Signals for Markets

In the statement, Powell highlighted that President Donald Trump’s recent tariff increases are expected to delay progress in reducing inflation this year. While he acknowledged that these tariffs could have a temporary impact on prices, he noted that it is too early to determine whether they necessitate a response from the Federal Reserve.

In its latest Summary of Economic Projections (SEP) releases, the Fed revised its GDP growth forecast for 2025 down to 1.7%, reflecting concerns over slowing economic activity. Meanwhile, the inflation forecast was raised to 2.7%, highlighting persistent price pressures and concerns over “stagflation.”

The Fed’s updated Summary of Economic Projections reflected a mixed economic picture:

• GDP growth for 2025 was revised down to 1.7% (from 2.1% in December 2024), signaling concerns over a slowing economy.
• The inflation forecast increased to 2.7% (from 2.5%), suggesting that price pressures remain more persistent than previously anticipated.
• Unemployment Rate forecast increase to 4.4% (from 4.3 indicating a potential labor market cooldown due to economic slowing.

Despite recent cooling in the labor market, Powell reiterated that inflation remains the primary concern, reinforcing the Fed’s reluctance to move too quickly on rate cuts.

Market Reaction: Stocks Rally, Gold Hits Another Record High

Investors reacted positively to the Fed’s decision and Powell’s cautious yet slightly dovish tone:

• Wall Street rallied, with the Dow Jones Industrial Average gaining 383 points and the Nasdaq jumping 1.4% as traders priced in a greater likelihood of rate cuts later in 2025.
• Gold surged past $3,000, reaching new record highs as investors sought safe-haven assets amid concerns over inflation and slowing economic growth.
• The U.S. Dollar (DXY) weakened slightly as markets anticipated eventual rate cuts later in 2025. However, despite the initial dip, the dollar remained relatively steady overall.

Technical Outlook: US Dollar Index

(DXY, Day Chart; Source: Trading View)

The DXY remains below the bearish zone despite limited movement. With the Fed adopting a cautiously dovish stance, pressure on the U.S. dollar could persist, especially alongside the impact of Trump’s policies.

If the dollar loses ground at its current support level, further downside remains possible, potentially pushing it lower.

Disclaimer

Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.