Preamble: Following the release of the University of Michigan inflation expectations data, we have updated our models accordingly. The elevated long-term expectations are particularly concerning for the Fed, making it unlikely that Powell can fully disregard this signal. Nevertheless, as explained below, we believe the Fed will opt to remain patient during this meeting.
Wait and See.
We anticipate the March 2025 FOMC meeting outcome will reflect a “wait and see” stance. Recent data have been notably mixed, making clear signals difficult to discern. On balance, inflation has surprised to the upside, with additional inflationary pressures likely due to impending tariffs. Conversely, growth indicators suggest rising downside risks. Inflation expectations have increased, and households sentiment has deteriorated. Moreover, pi* has edged slightly higher, uncertainty remains elevated, and medium-term forecasts offer little clarity regarding the Fed’s dual mandate.
In short, we believe the FOMC is unlikely to commit strongly in either direction. In the Summary of Economic Projections (SEP), we expect downward revisions to real GDP growth for 2025, slight upward adjustments to core PCE inflation (and possibly the unemployment rate), and an unchanged federal funds rate forecast. Thus, the policy stance will likely remain cautious—”Wait and See.”
Main points:
- Recent data have been a bit stronger than anticipated relative to the Fed staff’s forecast implied by the latest FOMC minutes. There has been no improvement in the distribution of price changes, which continues to be inconsistent with the inflation target.
Figure 1. Core CPI MoM prices change distributions.
- The medium-term forecast has been revised slightly upward, as well as the estimate of pi*. Compared to the previous projection, the medium-term model-based forecast is a bit stronger, reflecting recent data. The estimate for pi* is revised up to 2.5%, still above the target.
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*), the crucial variable in the Fed staff forecast, is revised up. According to our models, the Fed staff is estimating pi* at 2.5 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
Path of the Federal Funds (FF) rates. This round we do not have a clear message from the models and the Taylor rules. FRB-US indicates small downside risks around the December SEP projection, while inertial Taylor rules project a less dovish path. Given the high uncertainty, persistent inflation, rising expectations, and upside risks for the unemployment rate, we expect no or minimal changes to the path of the FF rate in the upcoming SEP.
Figure 4. FRB-US model forecast
As usual, we would be more than happy to schedule a meeting to discuss the details.