Fed Talk 3.19.25 – CAPATA Financial’s Take on FOMC Press Conference

Notable comments from Chairman Powell during today’s FOMC press conference and announcement.

From the FOMC statement:

• “Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion.”: The slowing of balance sheet runoff through quantitative tightening (QT) will allow the New York Fed, via the Open Market Desk, to reinvest principal amounts exceeding $5 billion back into the balance sheet.  By moderating the pace of runoff, the Fed will maintain a larger balance sheet, enhancing its ability to apply downward pressure on long-term yields by extending the maturity of its holdings in the System Open Market Account (SOMA).  This shift represents a dovish signal, providing greater flexibility moving forward and strengthening the Fed’s position should economic growth slow.

From the FOMC press conference

• “Surveys of households and businesses point to heightened uncertainty about the economic outlook.  It remains to be seen how these developments might affect future spending and investment.”: Powell’s prepared remarks highlighted that, although sentiment has been negative recently, it remains to be seen if or when this will translate into hard economic data. Throughout the press conference, Powell addressed this concern by emphasizing the importance of distinguishing signals from noise.  He reiterated that the economy’s hard data remains strong, with unemployment at 4.1%, real GDP at approximately 2%, and PCE inflation at 2.5%.  Powell later commented to a reporter, “Survey data and actual data don’t always align.”

• “…it can be the case that its appropriate sometimes to look through inflation if its going to go away quickly without action by us, if its transitory…It will depend on tariff inflation moving through fairly quickly with longer term inflation expectations remaining well anchored.”:  When addressing a question on whether the committee was “looking through” short-term inflation expectations increasing, Powell defended their stance by stating that the base case is that tariff-driven inflation will be transitory, but it is too soon to tell given the uncertainty surrounding the new administration’s policy changes.  He noted that these changes extend beyond trade policy to include immigration, regulatory, and fiscal policy as well.  The transitory base case was immediately compared to the Fed’s previous transitory inflation call during the post-pandemic economic reopening.   However, Powell was quick to highlight key differences between the two economic scenarios, adopting a more cautious, wait-and-see approach this time.

• “I do think with the arrival of the tariff inflation, further [inflation] progress maybe delayed.” :  Powell defended the SEP projections by stating that slower growth would be offset by slightly higher short-term inflation due to tariffs, which is why the committee is forecasting core inflation to remain relatively unchanged this year.  Broadly speaking, economists associate increases in core inflation with demand-driven factors, while increases in headline inflation are typically related to supply-side issues.

• “…if you go back two months the possibility of a recession was extremely low…it has moved up but is still not high.”:  The optimism at the start of the year reminds me of Warren Buffett’s famous words: “You pay a very high price in the stock market for a cheery consensus.”  Powell downplayed recession fears, noting that there is always a one-in-four probability of a recession at any given time.  The fact that some forecasters have raised that probability doesn’t seem to concern him.  He reiterated at this press conference that he believes policy remains well-positioned to respond if either side of the Fed’s dual mandate deviates further from its intended goals.

• “We are not going to miss any evidence that long-term or medium-term inflation expectations are rising.”:  In response to a reporter’s question about the Michigan survey showing that long-term inflation expectations had moved up, Powell acknowledged the data point but argued that, broadly speaking, the overwhelming majority of surveys indicate that long-run inflation expectations remain well-anchored.  Powell emphasized his understanding of the historical context of long-term inflation expectations moving higher as a self-fulfilling prophecy.  This was empirically studied during the 1970s inflationary period of “price-wage spirals,” with economists showing that market psychology around inflation expectations led to actual inflation.

In summary, Powell emphasized the heightened uncertainty surrounding the future economic impact of the new administration’s policies on trade, immigration, regulation, and fiscal policy.  He noted that while sentiment has turned negative, this shift has not yet appeared in hard data.  The economy remains on solid footing, supported by low and stable unemployment at 4.1%, real GDP growth of approximately 2%, and headline PCE inflation at 2.5%.

The major takeaway from the press conference was the Fed’s decision to slow quantitative tightening (QT)—reducing Treasury runoff from $25 billion to $5 billion per month—while maintaining agency MBS runoff at $35 billion per month as it accelerates the transition to an all-Treasury balance sheet.  This slowdown in QT signals two key objectives:

1. A gradual approach to balance sheet reduction – The Fed aims to avoid a repeat of the September 2019 repo market freeze, which occurred during its previous attempt to shrink the balance sheet.
2. Greater influence over long-term yields – With a larger balance sheet, the Fed can extend the maturity of holdings in the System Open Market Account (SOMA) to help buffer long-term interest rates.

Although the Fed does not directly control long-term Treasury rates, it can still influence them.  This is evident in the latest H.4.1 report, which shows over $1.5 trillion in Treasuries with maturities exceeding ten years. The dovish move to slow QT underscores the Fed’s cautious approach to reaching an ample reserves level.  Additionally, it retains the flexibility to increase long-term Treasury holdings to prevent excessive credit tightening— particularly in the event of a macroeconomic shock from a potential trade war, which could lead to a simultaneous demand slowdown and a supply shock from tariffs.