Last week, although the Federal Reserve significantly revised down its growth projections and raised its inflation forecasts in the Summary of Economic Projections, Chair Powell emphasized that the inflationary impact from tariffs would be temporary. At the same time, the Fed maintained its projection for a 50 bps rate cut this year and announced a slowdown in the pace of balance sheet reduction, which helped ease market concerns about a potential economic slowdown and pushed the S&P 500 up 0.51% for the week to close at 5,667.57.
In the bond market, the Fed’s reaffirmation of its 50 bps rate cut projection and its downward revisions to economic growth contributed to a modest decline in U.S. 10-year Treasury yields by 7 bps to around 4.25%. The U.S. dollar index remained near 104.1.
Key Economic Data Last Week
FOMC Rate Decision: At its March meeting, the Federal Reserve unanimously voted to keep interest rates unchanged at 4.25%–4.50%, in line with market expectations. The statement removed the language that “risks to achieving employment and inflation goals are roughly balanced,” replacing it with “uncertainty in the economic outlook has increased,” highlighting concerns over federal spending cuts, immigration policy, and tariff fluctuations.
On monetary policy, the Fed reiterated that it will “carefully assess incoming data” before making further adjustments to interest rates. While quantitative tightening will continue, starting in April, the monthly cap on Treasury runoff will be reduced from $25 billion to $5 billion, with no change in caps for agency debt and MBS. This brings the total monthly runoff pace from $60 billion to $40 billion.
Summary of Economic Projections: Reflecting shifts in government policy and the impact of tariffs, the Fed lowered its GDP growth forecasts for 2025–2027 and raised its inflation estimates for 2025.
- GDP Growth: 2025: 1.7% (prior: 2.1%), 2026: 1.8% (prior: 2.0%), 2027: 1.8% (prior: 1.9%)
- Unemployment Rate: 2025: 4.4% (prior: 4.3%), 2026: 4.3% (unchanged), 2027: 4.2% (unchanged)
- PCE Inflation: 2025: 2.7% (prior: 2.5%), 2026: 2.2% (prior: 2.1%), 2027: 2.0% (unchanged)
- Core PCE: 2025: 2.8% (prior: 2.5%), 2026: 2.2% (unchanged), 2027: 2.0% (unchanged)
The 2025 median dot in the dot plot indicates a policy rate of 3.875% (down 50 bps), further declining to 3.375% in 2026 and 3.125% in 2027 (down 25 bps), with the long-run neutral rate estimated at around 3.0%. Although the overall message remained “gradual easing,” a slight upward shift in the dot plot revealed that more members prefer a slower pace of rate cuts to observe the full impact of policy changes.
U.S. February Retail Sales: Retail sales growth in February slowed to 3.1% year-over-year (prior: 3.9%), while monthly growth rebounded to 0.2% (prior: -1.2%). Among the 13 major retail categories, six posted gains, primarily led by increases in food and beverage sales, online retailers, and health and personal care.
Sales related to durable goods—such as autos and electronics—continued to decline, although the pace of contraction slightly eased. Meanwhile, food services and drinking places, which serve as a gauge of household financial health, also weakened further, registering the lowest level in a year.
However, core retail sales—excluding autos and gasoline—still rose 3.5% YoY (prior: 3.6%) and recovered to 0.5% MoM (prior: -0.8%). Control group sales, which also exclude food services and building materials, climbed 4.4% YoY (prior: 3.7%) and 1.0% MoM (prior: -1.0%), indicating that overall consumer spending remains resilient.
Bank of Japan Rate Decision: At its March meeting, the Bank of Japan unanimously kept the policy rate unchanged at 0.50%, in line with expectations. The statement noted that inflation has been driven by rising service prices amid wage increases, as well as soaring rice prices due to supply shortages. The BoJ expects rice prices to remain elevated through 2025, and with the government energy subsidy expiring in March, upside risks to inflation remain.
While recent economic data has largely met the central bank’s expectations and wage growth appears on track, uncertainty surrounding U.S. retaliatory tariff policies—set to be announced on April 2—continues to cloud the global trade outlook. The BoJ has incorporated these risks into its policy assessment, and markets view the upcoming meeting as pivotal for the next potential rate hike.
Key Economic Data This Week
U.S. PCE: While temporary distortions from January have eased, February PPI showed upward pressure in some PCE components due to tariff impacts. Still, the Atlanta Fed projects February PCE inflation to slow to +2.37% YoY (prior: 2.51%), with core PCE easing to +2.59% (prior: 2.66%).
Eurozone PMI: While Germany’s election outcome has reduced political uncertainty and its €500 billion fiscal expansion boosted sentiment, uncertainty over U.S. trade policy remains elevated. The Eurozone PMI is expected to remain in contraction at 48.3.