US Fed likely to stand pat on interest rates, economic projections to steer market sentiment

The US Federal Reserve is widely expected to keep the federal funds rate unchanged at its current range of 4.25–4.50 percent in its second monetary policy meeting of the year, scheduled for 18–19 March 2025. While this anticipated decision aligns with the Fed’s cautious stance on policy tightening amid uncertainties stemming from Trump’s tariff plans and their ripple effects on the US economy, it will be the central bank’s economic projections that will garner greater prominence.

“The US Fed is expected to hold the interest rates steady and the market will focus on the updated economic projections and commentary for clues on the path ahead,” said Siddhartha Khemka, Head – Research, Wealth Management, Motilal Oswal Financial Services.

What this means is that financial markets may react strongly to any shift in the Fed’s commentary or future economic projections on the back of lingering uncertainties, rather than the policy decision itself. Markets will also be especially sensitive to the outlook for future rate cuts, with positive hints likely to spur buying across equities while increased caution may trigger a rout.

A dovish stance could also weaken the US dollar, acting as a positive trigger for emerging markets like India, whereas a more hawkish approach may bolster it against major currencies, dragging domestic sentiment.

Focus on Fed’s dot-plot

The spotlight in the Fed’s March meeting will be on the updated economic projections, commonly known as the “dot plot,” which outlines FOMC members’ individual expectations for future interest rates. Investors will closely gauge this dot-plot to identify any shifts in the committee’s outlook.

The previous dot plot from December suggested fewer rate cuts than markets had anticipated for 2025. Any changes to this forecast will be a key focus for those looking for hints on the Fed’s policy direction.

Additionally, projections for GDP growth, unemployment, and inflation will be released, offering insights into the Fed’s expectations for the economy’s trajectory in the coming years. Upward revisions to economic projections can indicate the Fed’s confidence in economic resilience or concerns over emerging risks. On the other hand, any significant deviations from previous forecasts could trigger adverse market reactions across various asset classes.

Wait for rate cuts

Market consensus stands heavily titled in favour of interest rates remaining unchanged as data from CME FedWatch suggests 99 percent of market participants anticipate the Fed to hold rates. Despite that, rate cut expectations for the later part of the year are taking shape, with 55 percent of participants expecting another quarter-sized cut in the Fed’s June meeting.

While global markets are currently looking at two more rate cuts in 2025, those expectations can hinge on the tone and messaging from Fed Chair Jerome Powell’s press conference after the March meeting.

Powell’s remarks on inflation trends, employment data, and global economic risks will be closely scrutinised, more so as concerns of recessionary risks in the US gather pace amid Trump’s excessive tariff plans. Fed chair Powell had previously indicated that the central bank was not in a hurry to cut rates and rather focused on distinguishing between short-term noise and longer-term economic trends.

“The Federal Reserve is facing a delicate balancing act, as it attempts to manage inflation without triggering a slowdown. President Trump’s aggressive trade policies and the rollout of tariffs have led to uncertainty in markets and business sectors, exacerbating fears about the potential negative impact on economic growth,” said brokerage firm Motilal Oswal Financial Services wrote.

US inflation in February fell more than expected to 2.8 percent, below the forecasted 2.9 percent. This decline reinforced market expectations that the Federal Reserve may cut interest rates in the near future. However, the weaker-than-expected inflation data also heightened concerns about slowing economic growth in the US.

Meanwhile, the February jobs report also showed a slower-than-anticipated pace of job creation, with the economy adding 151,000 jobs, missing the 160,000 forecast, further adding jitters.

Impact on RBI’s monetary policy

The well-known adage, “When the US sneezes, the world catches a cold,” aptly underscores the far-reaching impact of US policy changes on global markets. Similarly, the Federal Reserve’s policy decisions and future outlook will significantly influence monetary policies worldwide, particularly in emerging markets that tend to struggle with a stronger US dollar.

Amid concerns that a cautious Fed stance could exert pressure on the Reserve Bank of India (RBI), Raj Vyas, VP – Research at Teji Mandi, believes India’s improving macroeconomic indicators will provide the central bank with enough confidence to lower interest rates at its next meeting.

“Domestic macro indicators are turning positive, yet markets seem to be overlooking these factors. With inflation now below the RBI’s 4 percent target, we expect the central bank to deliver a 25-basis-point rate cut at its April meeting,” Vyas stated.

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