### Fed Acknowledges Economic Uncertainty as Growth, Inflation Forecasts Revised
The Federal Reserve has highlighted a sharp rise in uncertainty regarding the economic outlook while maintaining an optimistic perspective on current conditions. The March Federal Open Market Committee (FOMC) statement noted that economic activity continues to grow at a “solid pace” and that the unemployment rate has “stabilized at a low level.” However, the Fed acknowledged that inflation remains “somewhat elevated.”
A key takeaway from the latest Summary of Economic Projections is the increased uncertainty in forecasts for growth, unemployment, and inflation. Compared to the December 2024 update, the current outlook presents a broader range of potential outcomes that the Fed must now consider.
While the FOMC opted to keep interest rates steady, officials lowered their growth forecast for real gross domestic product (GDP) to 1.7%, down from the previous estimate of 2.1%. They also raised projections for core Personal Consumption Expenditures (PCE) inflation to 2.8% from 2.5% and adjusted the unemployment forecast upward to 4.4% from 4.3%.
Marion Jones, principal and executive managing director of U.S. Capital Markets at Avison Young, remarked on the Fed’s decision:
*”The Fed’s decision to hold rates steady came as no surprise. While most investors continue to anticipate a soft landing from a macroeconomic perspective, we are closely monitoring the potential inflationary impact of heightened tariffs, especially concerning building material costs and availability.”*
Federal Reserve Chair Jay Powell addressed the challenge of distinguishing various sources of inflation, particularly in relation to former President Trump’s tariff policies. Powell acknowledged the complexity of identifying how much inflation is directly caused by tariffs, stating, *”clearly some of it” is attributable,* but noted it is too soon to determine whether the Fed can simply “look through” tariff-driven price increases.
Although Powell refrained from mentioning Trump explicitly, he pointed to the turmoil in Washington as a significant factor affecting economic sentiment. *”We understand that sentiment is quite negative at this time, likely due to the turbulence that comes with the early stages of an administration making significant policy changes,”* he said during the press conference.
Michael Underhill, Chief Investment Officer at Capital Innovations, noted the shifting economic landscape:
*”Earlier this year, the U.S. economy showed positive signs, with solid hiring and growth, accompanied by declining inflation. However, challenges such as ongoing inflation, tariff threats, and declining consumer and business confidence have emerged.”*
Underhill further warned about the risk of stagflation—a scenario of stagnant economic growth combined with high inflation—stating that such conditions pose a unique challenge for the Fed, as conventional strategies to manage inflation or unemployment may conflict.
Despite the growing uncertainty, most Fed officials still anticipate interest rates will decline by year-end, reaching a range of 3.75% to 4%, consistent with December 2024 projections. However, there is a notable divergence among policymakers: eight officials now predict either no further rate cuts or just one, while only two expect a more significant reduction of 0.75 percentage points.
Jones added insight into the broader economic concerns:
*”In the near term, we expect continued volatility in the cost of capital. However, discussions around rate cuts are increasingly overshadowed by concerns over trade wars, rising costs, and potential supply-chain disruptions. These factors could impact the recovering office market, where every tenant improvement dollar is scrutinized.”*
Looking further ahead, the majority of Fed officials foresee an additional half-percentage-point rate drop by the end of 2026, bringing the federal funds target range to 3.25% to 3.5%. By 2027, most anticipate rates settling around 3%.
Bryan Jordan, Chief Strategist at Cycle Framework Insights, commented on the Fed’s likely course of action:
*”The Fed is likely to remain on hold in the short term due to renewed inflation concerns and what had, until recently, been a relatively steady pace of economic growth.”*
Jordan also noted that the recent spike in uncertainty and its early effects on investment, hiring, and consumer spending should eventually lead to the resumption of the Fed’s easing cycle.
Additionally, the Fed announced modifications to its balance sheet strategy. Starting in April, the central bank will slow the pace of its reduction of its $6.8 trillion portfolio of Treasury securities and mortgage-backed securities. This signals a more gradual approach to unwinding its sizable holdings.
Underhill highlighted the evolving focus on liquidity, stating:
*”With the near elimination of the Fed’s reverse repo program and the Treasury no longer needing to deplete its Treasury General Account (TGA), attention will now shift to the timing of the conclusion of the Fed’s balance sheet reduction.”*
