Federal Reserve — FOMC Statement (USA, 2025)

FOMC Minutes of the Federal Open Market Committee March 18 19, 2025 F E D E R A L R E S E R V E S Y S T E M Minutes of the Federal Open Market Committee March 18 19, 2025 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, March 18, 2025, at 9:00 a.m. and continued on Wednesday, March 19, 2025, at 9:00 a.m.1 Review of Monetary Policy Strategy, Tools, and Communications Committee participants continued their discussions related to their review of the Federal Reserve s monetary policy framework, with a focus on labor market dynamics and the FOMC s maximum employment goal. The staff briefed policymakers on the concept of maximum employment and related labor market indicators. They discussed conceptual benchmarks used in evaluating the position of the labor market relative to maximum employment and in ascertaining the interaction of maximum employment and price stability. They discussed a set of core labor market indicators used to help assess maximum employment, including the unemployment rate, job vacancies, the employment-to-population (EPOP) ratio, and the labor force participation rate (LFPR), and described the use of these indicators in assessing maximum employment during the pandemic-related recession and subsequent economic recovery. The staff also presented model-based analysis of simple monetary policy rules that respond to deviations of inflation from 2 percent but differ on whether they respond to shortfalls or deviations from maximum employment. Participants generally supported the current description of maximum employment in the Statement on Longer-Run Goals and Monetary Policy Strategy as being not directly measurable and changing over time for reasons owing largely to nonmonetary factors. Participants acknowledged that it is difficult to assess maximum employment and that they have been well served by monitoring a wide range of indicators that can vary depending on labor market and economic conditions. They also reflected on how both the Committee and the public have interpreted the current description of maximum employment as a broad-based and inclusive goal. Participants reviewed the relationship between the dual-mandate goals and noted that those goals are not necessarily in conflict when both unemployment and inflation are low. Participants also discussed 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 March 18 19, 2025 the implications of pursuing a strategy that seeks to mitigate shortfalls of employment from its maximum level, as described in the statement, and the ways the public has interpreted that approach since it was introduced into the statement. Participants indicated that they thought it would be appropriate to reconsider the shortfalls language. They judged that any strategy conveyed in the statement should be robust to a wide range of economic circumstances. They also considered the extent to which the current statement had effectively communicated the Committee s approach to achieving its longer-run goals, including the Committee s assessment of the appropriate policy responses in a period of a tight labor market. Developments in Financial Markets and Open Market Operations The manager turned first to a review of financial market developments. Over the intermeeting period, Treasury yields declined, equity prices fell, credit spreads widened, and the dollar depreciated. These moves appeared to reflect increased perceived risks rather than a base case of a significant deterioration of the U.S. outlook, as investors responded to both weaker-than-expected consumer spending and sentiment data as well as to developments in trade policy that had raised uncertainty. The manager observed that the implied average federal funds rate path from futures had shifted noticeably lower over the intermeeting period for horizons beyond the middle of this year. By contrast, the implied modal federal funds rate path from options was little changed, consistent with the interpretation that the baseline outlook had not changed materially. The Open Market Desk s Survey of Market Expectations told a similar story, as the median respondent s modal path for the federal funds rate in 2025 was little changed. The expected timing of rate cuts in 2026 and 2027 was brought forward about a quarter, but the expected terminal rate was unchanged. Survey respondents, however, attached noticeably higher probabilities to both lower gross domestic product (GDP) growth outcomes and higher inflation outcomes for 2025 compared with the January survey, consistent with a higher perceived risk of a negative supply shock this year. Nominal Treasury yields declined about 25 basis points, on net, over the period, led by decreases in real yields that reflected lower expected real rates and lower real term premiums. Near-term measures of inflation compensation rose amid trade-related developments, while at horizons beyond a year, forward measures of inflation compensation fell. Overall, both market- and survey-based measures suggested that inflation expectations remained well anchored. U.S. equity prices decreased notably, on net, over the intermeeting period, with particularly pronounced declines in the technology and cyclical sectors. While trade-related news had been the most prominent driver of equity price movements, the manager also noted that risk-management considerations may have led some levered investors to reduce long equity positions that were generating increasing losses, amplifying price movements. Option-implied volatility of broad equity Minutes of the Federal Open Market Committee 3 prices increased over the intermeeting period to a level somewhat above its long-run average, and credit spreads widened, albeit to levels below historical averages. Asset price dynamics abroad were opposite to those in the U.S. Major foreign equity indexes, including those of the euro area and China, appreciated notably over the intermeeting period, while sovereign yields increased in many jurisdictions. The dollar depreciated against most major currencies, although currencies perceived as more sensitive to higher U.S. tariff rates, such as the Canadian dollar and those in emerging Asia, were relatively little changed. Overall, market participants characterized price action across global equities, global rates, and foreign exchange (FX) as consistent with some re-allocation away from trades that had been based on expectations for continued U.S. economic outperformance relative to global peers. The manager turned next to money market developments. Unsecured overnight rates remained stable over the intermeeting period, while rates in the repurchase agreement (repo) market varied notably, and some indicators suggested that conditions in that market had continued to tighten. The pass- through to repo rates of the 5 basis point technical adjustment to the overnight reverse repurchase agreement (ON RRP) rate made in December appeared to have dissipated in February, even though repo rates had declined in mid-March as a result of a drop in bill issuance associated with the debt limit situation. Furthermore, the sensitivity of repo rates in the client-to-dealer segment to changes in transaction volumes had diminished relative to the spike observed at year-end but remained at levels above those that prevailed in late 2024. The sensitivity of repo rates to Treasury bill issuance had also increased in recent months. The manager interpreted these developments more as signs of continued normalization of the repo market than as a concern, but he also noted that, in the past, a tightening of the repo market had been a precursor to tighter reserve conditions. The manager observed that the ON RRP facility had reached a post-2021 low of under $59 billion in mid-February. Abstracting from the debt limit situation, with the ON RRP facility nearly depleted, portfolio runoff was likely to translate to lower reserves in the future. Several indicators of reserve conditions continued to point to reserves remaining abundant, but the reliability of the signals provided by those indicators was starting to be impaired by the debt limit situation, which was already affecting the Federal Reserve s liabilities. The Treasury General Account (TGA) had declined nearly $300 billion since the debt issuance suspension period was declared in January. As a result, reserves were about $180 billion higher; ON RRP balances had also increased somewhat. Reserves were likely to continue to grow, except for periods around tax dates, until a resolution of the debt limit situation and then drop quickly as the TGA is rebuilt. In that scenario, reserves could potentially reach levels below those viewed by the Committee as appropriate without market indicators being able to provide much advance warning. The manager noted that either pausing or sufficiently slowing runoff would provide meaningful insurance against that possibility. 4 March 18 19, 2025 More generally, the manager also noted that slowing runoff would also be an effective way consistent with the Committee s plans of addressing the risks posed by a continued tightening of repo market conditions and a nearly depleted ON RRP facility. Desk survey results indicated that more than half of the respondents expected the Committee to either pause or slow runoff as its next move, with a majority of those leaning toward a slowdown. Many respondents also ex