Powell Delivers Cautious but Dovish Message, Markets Rally
3min read The Federal Reserve left its benchmark interest rate unchanged at 4.25% to 4.50% at its March 19 meeting, as widely expected. Alongside the decision, the Fed released an updated Summary of Economic Projections (SEP) that showed downward revisions to GDP growth expectations and upward revisions to inflation forecasts. While this adjustment was anticipated, the Fed also announced a slowdown in the pace of its quantitative tightening (QT) program, a move that provided a modest dovish tilt. During his press conference, Chair Jerome Powell maintained a cautious tone, repeatedly emphasizing the high level of uncertainty surrounding the economic outlook. Despite this, markets perceived his overall message as dovish, fueling a strong rally in equities during his remarks.
Ask Aime: What impact will the Fed's decision have on the stock market?
We would emphasize that everything is relative—while there was a dovish tilt to Powell’s message, it was far from a pivot. This was simply a message that leaned slightly less hawkish compared to previous statements. Powell, as expected, steered clear of political discussions but acknowledged that tariffs would likely contribute to inflation, noting that Fed officials had factored this into their forecasts. However, he stressed the difficulty in precisely tracking the impact.
Ask Aime: "Is the Fed's dovish tilt a pivot?"
On inflation, Powell repeatedly underscored the importance of hard data over sentiment-based surveys, another subtle dovish signal that suggested the recent CPI and PPI reports carried more weight than consumer inflation expectations from the University of Michigan survey. Equities rallied on a message that was better than feared, with some signs of a Fed put embedded in the language. However, the overall stance of monetary policy remained largely unchanged, which is why some of the initial conference call-driven gains began fading into the close.
The Balance Sheet and Quantitative Tightening
One of the more notable developments from the meeting was the Fed’s decision to slow the pace of its balance sheet reduction. Powell acknowledged that while the Fed’s QT program had reduced its holdings by over $2 trillion, recent market conditions warranted a more gradual approach moving forward. Beginning in April, the monthly cap on Treasury redemptions will be lowered from $25 billion to $5 billion, while the cap for mortgage-backed securities (MBS) will remain at $35 billion.
Powell made it clear that this adjustment was not intended as a shift in monetary policy but rather a technical decision to ensure a smoother transition as QT winds down. He stated that there was no current plan to taper MBS runoff but left the door open for adjustments if needed. This change, while expected, reinforces the idea that the Fed is willing to adapt its balance sheet strategy based on liquidity conditions.
Risks and Inflation
Throughout his remarks, Powell repeatedly highlighted the high degree of uncertainty surrounding the economic outlook. He acknowledged that risks to growth had increased, while risks to inflation and unemployment had tilted to the upside. However, he sought to differentiate between hard economic data and more pessimistic survey-based sentiment indicators, suggesting that while inflation expectations in surveys had worsened, actual inflation data did not yet justify major concern.
Regarding inflation pressures, Powell admitted that tariffs had likely contributed to recent spikes in goods inflation but cautioned that it was difficult to precisely quantify the impact. He suggested that while some of the inflation increase could be tied to tariffs, other factors such as supply chain adjustments and consumer demand shifts were also at play. Powell left the door open to looking through tariff-driven inflation if it proved temporary but emphasized that such decisions would depend on broader economic conditions.
Fed’s Rate Projections and Market Interpretation
The SEP projections showed that Fed officials continue to expect two rate cuts in 2025, even as they forecast slightly higher inflation. When asked why the Fed was still projecting rate cuts despite raising its inflation outlook, Powell explained that while inflation progress had stalled, the economy was also expected to slow, and the unemployment rate was projected to rise slightly. This combination justified keeping rate cut projections largely unchanged.
His response was taken as dovish by markets, particularly when he emphasized that monetary policy was not on a preset course and that the Fed would adjust as needed. Investors viewed this as a signal that the Fed remains flexible and could lean toward easing if growth slows more than expected.
Recession Risks and the Stock Market
Powell was asked about the probability of a recession, to which he responded that the risk remains within historical norms—typically around a one-in-four chance at any given time. While he acknowledged that some forecasters had raised their recession probabilities, he maintained that risks had only modestly increased from previously low levels.
One area Powell carefully avoided was a direct discussion of stock market valuations. While he has previously commented on some asset prices being elevated, he declined to weigh in this time, instead reiterating that the Fed focuses on overall financial conditions rather than specific market levels. He stated that while financial conditions do matter for policy decisions, the Fed is primarily concerned with whether persistent tightening in markets spills over into real economic activity.
Market Reaction
Equities rallied sharply during Powell’s remarks, as investors interpreted his tone as dovish. This was partially driven by the Fed’s decision to slow QT, which increases market liquidity, but also by Powell’s repeated emphasis on uncertainty and the Fed’s willingness to react as needed. The rally was further amplified by technical factors, with markets entering the meeting in an oversold condition and bearish sentiment running high.
Ultimately, Powell’s message reinforced the idea that the Fed is willing to be patient and responsive to evolving economic conditions. While the central bank remains data-dependent, its decision to slow QT and its acknowledgment of increased uncertainty suggest a more cautious stance that investors welcomed. The focus now shifts to incoming inflation data and broader economic trends, which will determine whether markets continue to price in rate cuts or adjust expectations in the months ahead.
