SEP As Expected, FRB-US Strikes Again.
The outcome of the March FOMC meeting was largely as anticipated. The Fed opted to take its time, recognizing the high level of uncertainty and the risks on both sides of its mandate. As expected, the new Summary of Economic Projections (SEP) reflects no changes to the federal funds rate trajectory, lower GDP growth, a slightly higher unemployment rate, and higher inflation. Once again, the SEP aligns closely with the latest signals from the FRB model, particularly for 2025.
To us, the message is clear: exercise patience and hold steady. Time will ultimately reveal which side of the Fed’s mandate—employment or inflation—takes precedence.
As usual, we analyze Powell’s most relevant remarks. However, this time, two of his answers left us somewhat puzzled—see our breakdown below.
(Note: Given that some commentators are using the word “stagflation”, we remind the reader about the academic literature – see here).
Statement
The new statement is similar to the previous one. The only difference (for the part we cover) is that the committee has stressed the increased uncertainty.
The dots
FRB-US strikes again.
Figure 1 compares the December SEP (solid blue line), the FRB-US model’s pre-FOMC run (dashed red line), and the new March SEP (blue dots). As expected (see our Pre-FOMC Meeting package for details), the projected path of the federal funds rate remains unchanged. This aligns with the FRB model, as real GDP growth has been revised downward for 2025, the unemployment rate is slightly higher, and core PCE inflation is now expected to reach 2.8% in 2025—consistent with the model’s projections.
The only lingering question is why the new SEP also includes downward revisions to real GDP growth in 2026 and 2027. At this point, we don’t have a clear answer, and unfortunately, no questions were raised on this issue during the meeting. If you’re interested in discussing this further, please reach out.
Overall, the message conveyed by the new dot plot aligns with the projections from FRB-US and our own research. The most likely scenario is a slowdown—though not yet a recession—accompanied by persistent inflation. The Fed retains the option to cut rates if needed, but for now, exercising patience seems like the prudent approach.
Figure 1. Comparison between the December SEP (blue solid line), pre-FOMC FRB-US model run (red dashed line), and the March SEP (blue dots).
Q&As
Question: How much of the increase in core PCE is tariffs? Is it a one-time level shift?
Powell. “Let me say that it is going to be very difficult to have a precise assessment of how much of inflation is coming from tariffs and from other [factors, ndr]. You may have seen that goods inflation moved up pretty significantly in the first 2 months of the year. Trying to track that back to actual tariff increases [is] very, very challenging. […] clearly some of it, a good part of it is coming from tariffs, but we will be working to try to find the best possible way to separate non-tariff inflation from tariff inflation.
[…] It is too soon to say about that [whether it is a one-time level shift]. As I’ve mentioned, it can be the case that it’s appropriate to look through inflation if it’s going to go away quickly without action by us. If it’s transitory -and that can be the case in the case of tariff inflation- I think that would depend on the tariff inflation moving through fairly quickly and critically as well on longer term inflation expectations being well anchored.”.
Comment: Powell is right in stating that it’s difficult to determine in real-time how much of inflation stems from tariffs versus other factors. However, we remind readers of the evidence in the data (distributions): there has been no meaningful progress over the past year. In other words, even without tariffs, the latest month-over-month inflation readings are not surprising to us and are likely driven by factors unrelated to tariffs.
Question: Are inflation expectations still well-anchored?
Powell. “We do monitor inflation expectations very, very carefully. Basically, every source we can find… short-term, long-term… households, businesses, forecasters, market based… You do see increases in short-term inflation expectations and people who fill-out surveys and answer, you know, questionnaires are pointing to tariffs about that. Further out you really don’t see much […]”. Powell also talked about the increase in long-term Michigan, and labelled it as “an outlier”.
Comment: Yes and no. Yes, the Michigan 10-year inflation expectation is somewhat of an outlier, and yes, the Fed’s Common Inflation Expectations (CIE) index still has room to move further. But no—a Fed Chair downplaying such a signal could be a significant mistake. Time will tell, but in our view, Powell misstepped today, at least in terms of communication.
Question: Is it “transitory” as it was last time (in 2022)?
Powell. “Of course we’re well aware of that. […] If there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy. Because by the time you have your effect, […] you are lowering economic activity and employment. And if that’s not necessary, you don’t want to do it in real time, as we know, it’s hard to make that judgment. And we’re well aware, you know, of what happened, obviously, with the pandemic inflation. But, I mean, we have to look at this as a different situation. There are differences and similarities. I mean, it’s a different time. You know, we haven’t had real price stability fully reestablished yet. And we have to keep that in mind”.
Comment: Powell is highlighting the typical trade-off that arises from supply shocks: inflation temporarily rises but eventually returns to its previous level without the need for monetary policy intervention—oil shocks being a classic example. That said, the key factor determining the persistence of inflation is whether, after the shock, demand conditions remain supportive (which caused problems in 2022) and whether inflation becomes ingrained in expectations (a potential risk for 2025). So yes, Powell is correct—there are risks this time as well.