Fed keeps rates unchanged

The US Federal Reserve kept policy rates unchanged on Wednesday, leaving the upper bound at 4.5%. The unanimous decision had been widely anticipated. The wording of the accompanying statement remained broadly unchanged from December, with the committee noting that “inflation remains somewhat elevated”. The statement also highlighted the continued strength of economic activity, despite recent heightened market concerns about the possibility of a contraction in GDP and noted that the labour market “remained solid”. Notably, in the press conference following the decision, Jerome Powell appeared to downplay tariff related risks, suggesting that the inflation impact could be “transitory”. The Fed also made changes to its Quantitative Tightening policy from the beginning of April, with the cap on debt that matures and not be replaced each month declining to USD5bn from USD 25bn.

In addition to the FOMC decision, the Fed also released the latest summary of economic projections. The updated forecasts include a downward revision to GDP growth, which is expected to moderate to around 1.7% in 2025 from a December forecast of 2.1%. The Fed also made an upward revision to its inflation forecast, with the PCE index now expected average 2.75% in 2025, up from 2.45% in the December forecast round. Despite the revisions the committee’s expectations for rate cuts remained broadly unchanged with the median expectation remaining that there is scope for 50bps worth of cuts to the policy rate this year. We anticipate that there may be scope for slightly more, with a 25bps rate cut from the Fed at the June meeting, followed by one per quarter in Q3 and Q4 2025.

Eurozone CPI was revised down to 2.3% y/y in the final print for February, from an initial value of 2.4%. The revision appears to have been driven by an unexpected decline in the pace of inflation in Germany.

Today’s Economic Data and Events

• 11:00 UK unemployment rate, January. Forecast: 4.4%
• 16:00 UK BoE bank rate decision. Forecast: 4.5%
• 16:30 US Initial jobless claims, w/e 15 March. Forecast: 224k

Fixed Income

• US treasury yields fell on Wednesday, with the Fed dot plot continuing to suggest that the committee favoured 50bps worth of cuts this year, unchanged from the December forecast. The 2yr yield fell 7bps to 3.923%, while the 10yr yield declined by 4bps to 4.2428%.
• There were broad-based falls in major European bond yields on the day. The 10yr Gilt yield fell 1.6bps to 4.629%, while the 10yr Bund declined by just under 1bps to 2.800%.

FX

• The dollar pared gains following the Fed decision but nonetheless ended the day 0.2% stronger against a basket of peer currencies. EURUSD fell 0.4% to 1.0903. GBPUSD saw a small gain, increasing by 0.02% to reach 1.3003. USDJPY fell 0.4% to reach 148.69.
• Commodity currencies were slightly weaker against the dollar on the day. AUDUSD fell 0.06% to 0.6357, NZDUSD declined by 0.09% at 0.5815, and USDCAD rose by 0.2% to 1.4326.

Equities

• US stocks rallied on Wednesday following the release of the Fed’s latest forecast which showed that policy makers still favour 50bps worth of cuts to rates this year. The Dow Jones gained 0.9%, the S&P 500 rose 1.08%, and the NASDAQ increased by 1.41%.
• Moves in major European equity indices were generally positive, with signs of progress towards a ceasefire between Ukraine and Russia. The Eurostoxx 50 gained 0.4%, the CAC 40 rose 0.7% and the FTSE 100 inched up 0.02%. The DAX was the outlier on the day, declining 0.4%.
• Locally, the DFM fell 0.6% and the ADX closed 0.4% lower. The Tadawul fell 0.7%.

Commodities

• Brent futures rose 0.3% to USD 70.78/b, while WTI increased by 0.4% to USD 67.16/b. Estimates from the EIA showed that gasoline inventories were at their lowest levels since January and that the build in crude inventories was smaller than suggested by the API earlier in the week.