Fed meeting: Three things to watch out for as Trump policies cloud outlook

Jerome Powell’s press conference and Fed’s latest projections to be closely monitored by markets

Federal Reserve chairman Jerome Powell has maintained that the economy remains 'in a good place'. Bloomberg

Market watchers will closely follow the US Federal Reserve's decision on interest rates on Wednesday, as US President Donald Trump's policies continue to cast uncertainty over the economic outlook.

Inflation is still above the central bank's 2 per cent target and traders widely anticipate the Fed to hold its target interest rate range steady at 4.25 to 4.50 per cent, according to CMEGroup data.

However, there are still several developments Fed watchers will be paying attention to – not least chairman Jerome Powell's news conference. The Fed will release its announcement at 2pm eastern time – 10pm UAE time – and Mr Powell is due to speak to reporters 30 minutes later.

The 'dot plot'

Traders will be closely watching the Fed's latest economic projections for their interest rate forecasts. The Fed updates its economic projections every three months.

Projections released in December showed that the median Fed official projected lowering the federal funds rate to 3.9 per cent by the end of this year before lowering it further to 3.4 per cent in 2026 and 3.1 per cent in 2027. Those projections were raised from their September forecasts.

Drawing most of the attention will be the “dot plot”, which shows where every Fed member anticipates interest rates will drop at the end of the year. Ten Fed officials projected rates would fall between 3.75 and 4 per cent by the end of 2025.

“We don’t expect a major shift although the Fed may want to reflect current market expectations by pushing the 2025 median estimate slightly lower,” Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management, said in a note.

Fed officials will also update the latest projections on economic growth, the unemployment rate and their preferred inflation metric. But the Fed will be making these projections against an uncertain backdrop.

“The underlying macro forecast is likely to be dragged in two directions: a slightly firmer inflation outlook and a slightly weaker real-side outlook,” Derek Tang, economist at LH Meyer, said in a note.

Powell remarks

Perhaps gaining the greatest attention on Wednesday will be Mr Powell's press conference. The Fed chairman will likely be grilled by financial reporters on the central bank's views on forward guidance, Fed independence and the uncertainty of the effects of Mr Trump's policies.

Those uncertainties have caused turmoil in markets over recession fears. Still, he maintained an optimistic posture heading into the Fed's most recent period of silence.

“We are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity,” he said in prepared remarks at a conference in New York on March 7.

Mr Powell has also maintained that the economy remains “in a good place” despite the elevated uncertainty surrounding the Trump administration's policies on trade, immigration, fiscal policy and regulation.

Tariffs could have just a one-time inflationary effect, but that could change if there are a series of levies, he said at the time.

“What really would matter is what’s happening with longer-term inflation expectations and how persistent are the inflationary effects,” he said.

Quantitative tightening

The Fed could also provide clues or decisions on quantitative tightening or reducing its balance sheet. The Fed has reduced the size of its balance sheet by about $2.2 trillion since 2022.

The US Treasury Department began enacting “extraordinary measures” in January to avoid a US default. Some estimates suggest that the X-date, or the day the government would not be able to repay its debt, will not be until this summer. Congress is tasked with raising the debt ceiling, which currently stands at $31.4 trillion.

John Canavan, lead analyst at Oxford Economics, said Congress's lack of urgency in tackling the debt ceiling could make the Fed more cautious in reducing the size of its balance sheet, “encouraging the committee to pause this month”.

Minutes released from the January meeting showed that “several participants suggest halting or slowing balance sheet reduction pending debt ceiling resolution”.