Quick View – The Fed’s March decision: Hard data trump policy uncertainty

Since the rollout of President Trump’s economic agenda – with a sizeable helping of tariffs – the market has been whipsawed as it attempts to decipher what is negotiating bluster and what is likely to be implemented. Within this context, investors were watching to see how the Fed is assessing the potential economic impact of a range of policy prescriptions, including those pertaining to trade, immigration, fiscal policy, and regulation.

At the conclusion of Chairman Jerome Powell’s press conference, we think it’s safe to say the Fed – perhaps in contrast to a bullish market – remains in wait-and-see mode.

Despite the recurring theme of uncertainty in the Fed’s statement and Chairman Powell’s press conference, at first glance we were relatively surprised by the lack of hawkish or near-hawkish rhetoric. After all, the threat of tariffs, especially if countermeasures lead to an all-out trade war, represent an upside risk to input costs and consumer prices. Furthermore, the downward trajectory of inflation has moderated – especially among goods.

The absence of hawkishness, however, does not equal dovishness and the associated support for riskier assets, despite many bellwether sentiment surveys souring. But in the aftermath of the Fed’s decision, that is how markets seem to be interpreting the central bank’s approach. We, on the other hand, believe caution is merited as data dictated that the Fed had little choice but stick to the expected interest rate trajectory from its December meeting. The reason why, in our view, is revealed in nuances to other components of its updated Summary of Economic Projections.

Nothing to see here, folks?

Chairman Powell was careful to reiterate that the hard data continue to be solid, and hard data will determine how the Fed calibrates policy.

The unemployment rate has stabilized at a low level, and inflation continues to trend toward the central bank’s target. The impact of souring sentiment is likely responsible for the downward revision of 2025 economic growth from 2.1% to 1.7%. Similarly, this year’s unemployment rate was modestly revised upward from 4.3% to 4.4%. The seeds of a conundrum that the Fed could possibly find itself in can be found in 2025’s estimate for core inflation rising from 2.5% to 2.8%.

On one hand, lower economic growth could lend itself to the more dovish stance the market was quick to grasp onto, while higher inflation could cause angst among many Fed members in sticking to their anticipated trajectory of two more rate cuts in 2025. Importantly, the bank still expects inflation to reach the Fed’s 2.0% objective by 2027.

That optimistic scenario, in our view, is likely premised on a trade war not escalating, with the upshot instead being a single, front-loaded upward shift on price levels. History indicates that trade wars’ range of outcomes can be far wider, with many ramifications difficult to foresee. The dusting off of the now-infamous term transitory to describe tariffs’ potential impact on inflation should be worrisome for investors.

Market implications

Policy shifts, by their nature, are intended to have real economic consequences. Rejiggering established trade relationships and regulatory regimes is bound to have a material impact on how the corporate sector allocates capital. Until we gain further clarity on which policy proposals stick and assess their intended – and unintended – consequences, we believe company managers will be reticent to make big capital allocation decisions. This, alone, illustrates how uncertainty is a drag on economic growth.

Similarly, one would expect financial markets to behave rationally in such periods of policy uncertainty – something that may fly in the face of investors’ initial risk-on reflex. Lower growth expectations may portend lower rates, but with an economy categorized as notoriously late cycle for a very long time, any growth downgrades may flirt with contraction. That is not the impetus for lower rates that investors – or President Trump – want.

Although the market and the Fed are relatively aligned on the expected trajectory of the federal funds rate (with the former slightly more dovish), diverging inflation and growth expectations mean the situation is potentially volatile. We don’t think this is the time for making major shifts in duration positioning – even with the market’s, and the Fed’s, attention swinging from prioritizing inflation to supporting possibly flagging growth.

Still, with a viable resolution to this trade impasse possible and concurrent economic data steady, we think it would be misplaced to materially de-risk portfolios. Rather, diverging economic trajectories, global corporates’ strong balance sheets, and signs of life in Europe all align to reinforce the logic underpinning globally diversified equity and fixed income portfolios comprised of high-quality names.

Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.