The Federal Reserve maintained its benchmark interest rate at 4.25%-4.5% during its March meeting, keeping policy unchanged for the fourth consecutive month while signaling increased economic uncertainty.

The central bank also announced a significant reduction in its “quantitative tightening” program, slowing the monthly cap on Treasury securities runoff to just $5 billion starting in April.

Key Takeaways:

• Fed kept the target federal funds rate unchanged at 4.25%-4.5%
• The FOMC noted “uncertainty around the economic outlook has increased”
• Officials now expect slower economic growth of 1.7% in 2025 (down from 2.1%)
• Inflation projection was revised upward to 2.8% for 2025
• Significant slowdown in balance sheet reduction announced, with Treasury redemption cap cut from $25B to $5B monthly
• Two rate cuts still projected for 2025, but four FOMC officials now expect no cuts this year

Link to official FOMC Statement for March 2025

In the statement, the Fed acknowledged that “uncertainty around the economic outlook has increased,” a notable addition that reflects growing concerns about the impact of recent tariff measures and their potential to both slow economic growth and reignite inflationary pressures.

In addition, the updated FOMC Economic Projections revealed a more somber outlook, as officials downgraded their GDP growth forecast for 2025 from 2.1% to 1.7% while raising their core inflation outlook from 2.5% to 2.8%. This suggests the committee is increasingly concerned about “stagflationary” pressures – slower growth combined with persistent inflation.

Meanwhile, the dot plot of interest rate expectations appeared slightly less dovish, as only one committee member saw no rate changes for the year back in December compared to four policymakers now. Still, the dot plot reflected two likely cuts next year and one more in 2027.

Link to FOMC Economic Projections (March 2025)

While the committee still projects two quarter-point rate cuts by year-end, the decision to dramatically slow the pace of balance sheet reduction represents an indirect form of monetary easing, potentially offsetting some of the restrictive effects of keeping interest rates elevated.

The central bank now will allow just $5 billion in maturing proceeds from Treasuries to roll off each month, down from $25 billion, while keeping a $35 billion cap on mortgage-backed securities unchanged.

“If the economy remains strong, and inflation does not continue to move sustainably toward 2%, we can maintain policy restraint for longer,” Fed Chair Powell noted during his press conference. “If the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

Link to FOMC Press Conference (March 2025)

Market Reaction

U.S. Dollar vs. Major Currencies: 5-min

Overlay of USD vs. Major Currencies Chart by TradingView

The U.S. dollar, which had been cautiously moving sideways leading up to the top-tier event, dipped during the actual Fed statement and economic projections, as traders reacted to the scaling back of the quantitative tightening program and stagflation concerns.

A sharper selloff ensued during Fed head Powell’s press conference since he highlighted their openness to further easing if the labor market deteriorates but also noted that it’s too early to tell how tariffs might affect domestic inflation.

The most significant moves came against the New Zealand dollar (-0.52%) and Japanese yen (-0.74%). The dollar also weakened against European currencies but fought to stay afloat versus the relatively weaker Canadian dollar, with USD/CAD ending flat by session’s end.