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Daily Economic Update
20.03.2025US: Fed holds rates, sees two rate cuts in 2025, trims growth, and flags heightened uncertainty. The FOMC, as widely expected, unanimously voted to keep the Fed Fund target rate steady at the 4.25-4.5% range, as members cited increased uncertainty around the economic outlook. The dot-plot reflected two 25 bps cuts this year, followed by two more in 2026, unchanged from the December’s meeting. However, the dots did shift upward with now four participants seeing zero cuts in 2025 compared with only one in December’s meeting. The longer-run interest rate outlook was left unchanged at 3% after having increased steadily last year. Members trimmed GDP growth forecasts to 1.7% y/y from 2.1% for Q4 this year, and to 1.8% for Q4 next year from 2% and increased PCE inflation projection to 2.7% y/y (from 2.5% earlier), seeing the core inflation rate at 2.8% (from 2.5%) in Q4 2025, at least partially driven by higher tariffs. The bank also slowed the pace of balance sheet run-off (quantitative tightening, QT) to $40bn per month from $60bn by cutting the cap on treasury securities redemptions to $5bn. Chair Powell, in the post-meeting conference, repeatedly stressed the heightened uncertainty about the overall economic environment and indicated that their base-case reflects tariff-driven inflation to be “transitory”. He also downplayed recession risks, putting greater emphasis on the relatively still-robust hard data (such as employment and consumer spending indicators) than the more downbeat household and business surveys that recently showed a sharp fall in confidence levels. Financial markets cheered, likely driven by the no-change in the policy rate outlook, the Fed’s lower QT, and the committee’s seeming willingness so far to look through a likely increase in inflation, with the S&P 500 rising 1.1% d/d and UST 10Y bond yields dropping around 4 bps yesterday.
Eurozone: Inflation ticks down in February as underlying price pressures ease. Consumer price inflation fell to 2.3% y/y in February (from 2.5% in January), revised down from earlier estimates of 2.4%. Core inflation, meanwhile, fell to 2.6% y/y from 2.7% in the month prior, marking its lowest level since January 2022. Services inflation - a gauge for domestic price pressures – which has remained stubbornly high, moderated in February to its lowest level since April 2024 at 3.7% y/y. Separately, wage growth remains relatively high in the Eurozone, but Q4’s 4.1% y/y reading (4.3% in Q3) represents the third consecutive quarter of softening.
China: Central bank leaves benchmark lending rates unchanged in March. As expected, the People’s Bank of China (PBoC) left interest rates unchanged for the fifth month in a row in March. The one-year loan prime rate (LPR) which affects corporate and most household loans was left at 3.1%, while the five-year LPR – a benchmark for mortgage rates – was held at 3.6%. The no-change decision comes amid trade tensions with the US. Looking ahead, the PBoC said last week that it would cut rates and banks' reserve requirement ratio at the “appropriate time” and that it would keep liquidity ample. The PBoC will likely keep a close eye on the expected movement in the yuan before easing monetary policy further.