Federal Reserve Chair Jerome Powell faces a delicate balancing act this week, as he aims to reassure investors that the US economy remains on solid footing while also signalling that policymakers are prepared to act if necessary.
Despite Powell’s continued confidence in the resilience of the American economy, mounting concerns over President Donald Trump’s escalating trade war have unsettled markets. Over the past month, stock prices have tumbled, bond yields have fallen, and consumer sentiment has weakened, fuelling fears about the economic outlook.
A watchful federal reserve
As the Federal Open Market Committee (FOMC) meets on 18-19 March, the Fed is widely expected to keep interest rates unchanged. However, traders are now pricing in high odds of three rate cuts by the end of the year, with the first expected as early as June. Economists, meanwhile, anticipate two reductions, in line with what forecasters believe will be reflected in the Fed’s updated economic projections due on Wednesday.
Dominic Konstam, head of macro strategy at Mizuho Securities USA, believes Powell must acknowledge the market’s unease.
“Powell needs to give some sort of a signal that they’re watching it,” he said.
Although the Fed does not directly target stock market performance, officials cannot ignore the recent selloff, which saw the S&P 500 decline by 10% from its peak.
Should the Fed’s updated outlook indicate only two rate cuts in 2025, Powell may need to stress the central bank’s readiness to adjust policy if labour market conditions deteriorate.
“At the margin, the Fed could make it slightly better or slightly worse,” said James Athey, a portfolio manager at Marlborough Investment Management. “But clearly they can’t completely calm markets because the hit to sentiment has come largely from the White House.”
Economic concerns and white house messaging
Compounding investor uncertainty are the mixed signals from the Trump administration. On 9 March, the president warned that the US economy faces a “period of transition,” while Treasury Secretary Scott Bessent suggested that both the US and financial markets are in need of a “detox.”
The administration’s shifting stance on tariffs and trade negotiations has further unsettled markets. The two-year Treasury yield, which is particularly sensitive to monetary policy expectations, has dropped nearly 60 basis points from its mid-January peak to 3.83%—its lowest level in more than five months. Meanwhile, Wall Street’s so-called fear gauge, the VIX, surged to its highest levels since August before retreating slightly last week.
Fed officials are expected to slightly downgrade their growth forecast for 2025 while raising their inflation outlook. Yet, Powell is unlikely to commit to any immediate action without clear evidence of a sustained economic slowdown.
“We’ll hear the message that things are still holding up, and that policy is in a good place where the Fed can react in either direction—whether that’s stubbornly high inflation or a more marked slowdown in the economy,” said Sarah House, a senior economist at Wells Fargo & Co.
Inflation concerns and policy limitations
Although consumer prices rose at a slower pace in February, the Fed’s preferred measure of inflation—the Personal Consumption Expenditures (PCE) price index—remained firm. A key gauge of long-term inflation expectations also climbed for a third consecutive month, reaching a three-decade high.
Matthew Luzzetti, chief US economist at Deutsche Bank, believes this complicates the Fed’s ability to respond to economic weakness.
“There’s lots of uncertainty that’s out there, and it’s possible that that filters into the hard data, but they are going to be in kind of a wait-and-see mode to see whether or not that happens,” he said.
For the Fed to justify rate cuts, analysts say, there would need to be clear signs of a weakening labour market—such as slower job growth, rising unemployment, or a spike in layoffs.
“At the same time, I think they’re seeing greater evidence that their job on inflation is not done,” Luzzetti added.
A recent Bloomberg survey found that nearly two-thirds of economists expect the Fed to hold rates steady if the economy slows while inflation remains elevated.
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The balance sheet and quantitative tightening
Beyond interest rates, markets will also be looking for guidance on the Fed’s balance sheet strategy. Minutes from the Fed’s January meeting indicated that officials had discussed the possibility of pausing or slowing quantitative tightening (QT), which involves reducing the Fed’s massive holdings of government bonds.
With Congress yet to strike a deal on the government’s debt ceiling, some strategists believe the Fed may soon announce changes to its QT strategy.
“The argument for March is that the Fed has already talked about it,” said Blake Gwinn, head of US rates strategy at RBC Capital Markets. “So why not just do it—as they can pause QT and then just restart it later.”
Powell’s balancing act
As the Fed chair prepares for this week’s meeting, Powell remains cautious in his messaging. Earlier this month, during an event in New York, he reiterated the central bank’s measured approach to policy changes.
“Despite elevated levels of uncertainty, the US economy continues to be in a good place,” Powell said. “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
This patient stance, however, may not be enough to fully reassure anxious investors. With economic uncertainty mounting and Trump’s policy direction remaining unpredictable, Powell’s remarks this week will be scrutinised for any sign of how the Fed intends to navigate the months ahead.
