[Lu Zhe & Zhang Jiawei] Dovish Interpretation: More Concerned about Growth than Inflation —— A Review of the March 2025 FOMC Meeting-36氪

Dovish interpretation: more concerned about growth than inflation.

Core Views

In March, the FOMC did not cut interest rates as expected but significantly slowed down the pace of balance - sheet reduction. At the press conference, Powell was more concerned about the economic downturn than the upward inflation risk. The market interpreted this as dovish, and risk appetite rebounded. In terms of economic forecasts, the Federal Reserve lowered its growth forecast and raised its inflation forecast. The uncertainty about the growth and inflation outlook increased significantly, resulting in no significant change in the dot - plot compared to December. At the press conference, Powell began to pay more attention to the downward economic risks posed by tariffs rather than just emphasizing their upward inflation risks. In the short term, the employment data at the beginning of April and the implementation of tariff policies are expected to intensify market volatility. Coupled with Trump's tight - fiscal thinking and expected management, which may continue in Q2 2025, we expect the Federal Reserve to advance its interest - rate cuts to Q2 2025, with 1 - 2 cuts throughout the year. The U.S. Treasury yield may still decline to 4% in the short term, but we also need to be aware of the risk of it rebounding above 4.5% in H2 2025.

FOMC Statement: Kept Interest Rates Unchanged as Expected and Slowed Down Balance - Sheet Reduction

The FOMC meeting in March kept the policy interest rate unchanged at [4.25, 4.5]% as expected. Compared with the January meeting statement:

① Removed the description that the risks of unemployment and inflation were roughly balanced and expected increased uncertainty in the future economy. At the press conference, Powell said that removing the "roughly balanced" description of risks from the statement did not mean to send a signal.

② Initiated a slowdown in balance - sheet reduction (taper QT). Starting from April 1st, the reduction pace of U.S. Treasury holdings will be significantly slowed down from $25 billion per month to $5 billion per month, while the reduction pace of MBS will remain unchanged. Federal Reserve Governor Waller voted against this, believing that the current pace of balance - sheet reduction should be maintained.

Economic Forecast: Lowered Growth Forecast, Raised Inflation Forecast, and Significantly Increased Uncertainty in Growth and Inflation Outlook

① Output: The GDP forecast for Q4 2025 in the United States was significantly lowered from 2.1% to 1.7%. Correspondingly, the unemployment rate forecast for Q4 2025 in the United States was raised from 4.3% to 4.4%. The forecasts for Q4 2026 and Q4 2027 were lowered from 2.0% and 1.9% to 1.8% respectively, indicating that the U.S. economic growth is expected to return to the long - term equilibrium level in 2026 and 2027.

② Inflation: The PCE and core PCE forecasts for Q4 2025 in the United States were significantly raised from 2.5% and 2.5% to 2.7% and 2.8% respectively. The PCE forecast for Q4 2026 in the United States was raised from 2.1% to 2.2%.

③ Risks: The assessment of forecast uncertainty and risks showed that committee members expected a significant increase in the uncertainty of the growth and inflation outlook. The risk assessment of the growth outlook was changed from roughly balanced to a downward risk, and the risk assessment of the unemployment rate outlook was changed from roughly balanced to an upward risk.

Dot - Plot: The Guidance for Interest - Rate Cuts Remained at 2 Times Throughout the Year, and the Forecast Distribution Slightly Shifted Upward

Lower growth forecasts, higher inflation forecasts, and greater uncertainty in the economic outlook put the Federal Reserve in a dilemma. As a result, there was no significant change in the dot - plot compared to December last year, and it slightly shifted upward overall.

① 2025: The number of people expecting 1 - 2 - 3 interest - rate cuts throughout the year was 4 - 9 - 2 respectively, with a decrease of 1 person compared to the December dot - plot. The number of people predicting no interest - rate cuts throughout the year increased from 1 in December to 4. Therefore, although the median and mode of the March dot - plot both indicated 2 interest - rate cuts throughout the year, corresponding to a policy interest - rate range of [3.75, 4.00]%, the dot - plot was more hawkish than the previous one.

② 2026 - 2027: The number of people expecting 2 - 3 - 4 - 5 - 6 cumulative interest - rate cuts by 2026 was 1 - 2 - 9 - 1 - 3 respectively. The median was 4 cuts, corresponding to a policy interest - rate range of [3.25, 3.50]%. There were still significant differences in the forecasts, and 3 people believed that there would be only 1 cumulative interest - rate cut by 2026. It is expected that the interest rate will be cut to [3.0, 3.25]% by 2027.

③ Long - term Policy Interest Rate: The long - term policy interest rate is expected to remain at 3.0%, and the dispersion of the distribution shows that there is still a high degree of uncertainty in the long - term interest - rate forecast.

Press Conference: More Concerned about Economic Downturn than Upward Inflation

① Regarding the inflation outlook, recognized the impact of tariffs on commodity inflation and downplayed the upward short - term inflation expectations. At the press conference, Powell was first asked how to assess the impact of tariffs on U.S. inflation. Powell said that it was difficult to clearly distinguish how much of the inflation was attributable to tariffs, and it was still too early to study the impact of tariffs on inflation. However, there was indeed some cost - push inflation from tariffs. Partly due to tariffs, the further progress of disinflation this year may be delayed, but the baseline scenario is that inflation is transitory. Powell said that he was concerned about changes in inflation expectations but considered the recent inflation expectations of the University of Michigan to be an outlier. Although short - term inflation expectations soared, long - term inflation expectations did not change significantly and remained consistent with the 2% target.

② Regarding the growth outlook, believed that the economic fundamentals were still sound, but the concern about the downward growth risk increased. On the one hand, Powell believed that although the "soft data" such as recent market sentiment had weakened, the "hard data" showed that the economic fundamentals were still healthy. Market sentiment indicators such as consumer confidence were related to major changes in government policies. On the other hand, Powell interpreted the changes in the economic forecast, believing that the March economic forecast reflected that the committee's concerns about the risks of weak growth and upward inflation had both increased, and the impacts of the two on monetary policy offset each other. Forecasters had somewhat increased their expectations of the recession probability, although the probability was not high.

③ Regarding the outlook for interest - rate cuts, the Federal Reserve still remained data - dependent. When asked if there would be an interest - rate cut in May, Powell said that he was not in a hurry to cut interest rates.

④ Regarding balance - sheet reduction, said that slowing down balance - sheet reduction was not a signal of policy change but more of a precaution against a liquidity crisis. The statement of this meeting to slow down the pace of balance - sheet reduction slightly exceeded market expectations. Powell said at the press conference that the decision to slow down balance - sheet reduction was due to the impact of recent TGA flows. Specifically, we understand that due to the current debt - ceiling constraint, the U.S. Treasury cannot issue new debt at present and instead relies more on the funds in the TGA account to maintain the operation of the government. If the debt - ceiling crisis is resolved in Q3 2025, the Treasury will issue the bonds that were not issued in H1 2025 to "recharge" the TGA. At that time, the TGA scale may increase from 0 to the ideal level of $750 billion. If combined with the tax payment in September, it may bring a greater liquidity shock to the money market. After learning from similar situations in September 2019 and October 2023, the Federal Reserve began to take preventive measures in advance to prevent a liquidity crisis. Powell said that starting to slow down balance - sheet reduction earlier would also make the process of ending balance - sheet reduction smoother (it means we will make reductions more slowly, but for longer) and ultimately end in a soft - landing manner.

Outlook and Strategy: Pay Attention to the Short - Term Downward Growth Risk, and the First Interest - Rate Cut This Year May Be in Q2 2025

The market generally interpreted the March FOMC meeting as dovish. After the press conference, the expectation of an interest - rate cut in June rose from 62% to 80%. The yield of the 2 - year U.S. Treasury bond declined from 4.09% to 3.97%, the yield of the 10 - year U.S. Treasury bond declined from 4.32% to 4.24%, and the U.S. dollar index declined by 0.5 to 103.4. After the release of the meeting statement and during the press conference, U.S. stocks and U.S. copper prices soared but retreated after the press conference. Overall, the dovish stance of this FOMC meeting mainly came from two aspects:

① The slowdown in balance - sheet reduction slightly exceeded expectations.

② Although the meeting statement and economic forecast showed greater economic uncertainty, at the press conference, Powell gave more weight to the economic downturn (saying that "the probability of recession always exists" and "the questionnaire survey shows significant economic uncertainty and downward risks") than to inflation ("inflation expectations are not out of control" and "inflation is transitory under the baseline scenario"), which also led to no significant deviation in the dot - plot compared to the December FOMC meeting. The March FOMC meeting showed that the Federal Reserve has begun to pay more attention to the downward economic risks posed by tariffs rather than just emphasizing their upward inflation risks. Therefore, it is more cautious in evaluating the dual goals and making interest - rate cut decisions. Looking forward, the uncertainty about the economic outlook means that the weakening of economic data in the short term still has the opportunity to prompt the Federal Reserve to advance interest - rate cuts. In the short term, the job openings and manufacturing PMI on April 1st, the reciprocal tariffs on April 2nd, and the non - farm payrolls on April 4th are expected to intensify market volatility, impact the risk appetite of U.S. stocks, and may strengthen the expectation of an interest - rate cut by the Federal Reserve in Q2 2025. In the medium term, Trump's tight - fiscal thinking is expected to run through Q2 2025. Although tightening fiscal policy is an inevitable choice under the objective constraint of the high U.S. debt, judging from Trump and his cabinet's recent frequent statements and expected management, increasing the tightening is a "three - birds - with - one - stone" strategy: ① Lower the base to provide more room for the economy and U.S. stocks to rise after H2 2025; ② Blame Biden for the economic and stock - market downturn in H1 2025 and take credit for the economic and stock - market upturn in H2 2025; ③ Force the Federal Reserve to cut interest rates earlier to support the economy, while lowering the yield curve to relieve the interest burden and make more room for future loose fiscal policies. Therefore, we expect the Federal Reserve to advance its interest - rate cuts to Q2 2025, with 1 - 2 cuts throughout the year. The U.S. Treasury yield may still decline to 4% in the short term, but we also need to be aware of the risk of it rebounding above 4.5% in H2 2025.

Risk Warnings: The implementation pace of Trump's policies may deviate significantly from expectations; the Federal Reserve may maintain a high - interest - rate level for too long, triggering a liquidity crisis in the financial system; the downward rate of inflation may be lower than expected.

Data Source: Federal Reserve, Dongwu Securities Research Institute

Data Source: Bloomberg, Dongwu Securities Research Institute

Data Source: Federal Reserve, Dongwu Securities Research Institute

Data Source: Federal

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