The Fed Tilts Hawkish With Latest Interest Rate Projections

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Judging from the dot plot published with their latest economic projections, only 11 of the 19 members of the Federal Reserve's rate-setting Federal Open Market Committee plotted two interest rate cuts this year at their March meeting, down from 15 who did so in December. In this graphic, each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant's judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. Graphic: Federal Reserve Board

Longer term, the median projection is for the Fed's benchmark federal funds rate, which today is between 4 1/4% and 4 1/2%, to take until 2027 to fall to even 3.1%.

DTN's former Lead Analyst Todd Hultman said last September that getting the fed funds rate below 3% was critical to taking pressure off the farm economy.

With inflation sticky, the one thing that might have pushed the Fed to resume lowering rates was the possibility of a recession. But policymakers expressed no worries about the economic outlook despite recent consumer sentiment statistics that have stoked recession fears in some investors.

While lowering their GDP growth forecast for 2025 to 1.7% from 2.1%, they began their post-meeting statement by saying ,“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.”

Thanks to the Fed's confidence in the economy, the stock market closed up after the Fed's announcement. At least some Wall Street analysts, however, still think there's bad economic news coming.

If they're right, the Fed will find itself in a tricky situation. Usually, a weak economy brings inflation down, enabling the Fed to cut rates while being faithful to both sides of its dual mandate – maximum employment and stable prices.

If, instead, the economy weakens significantly while inflation remains elevated – a situation known as stagflation – the Fed would have to choose between fighting inflation, which would entail leaving rates high or even raising them, and boosting the economy, which would mean rate cuts. The Fed couldn't have it both ways.

If it chose to fight inflation, it could run up against a president who wants lower rates and who thinks he should have a say in interest rates. The Fed's independence would be at stake.

The one step the Fed took that looked dovish was to slow the unwinding of its $6.8 trillion balance sheet.

After acquiring Treasury and even mortgage debt to stimulate the economy in response to downturns, the Fed has been letting those assets mature without replacing them at the rate of $60 billion a month – $25 billion in Treasuries and $35 billion in mortgage instruments. Starting in April it will only allow $5 billion a month in Treasuries to expire without replacement.