As was widely expected, the Fed held interest rates steady in its March meeting. The changes to Summary of Economic Projections (SEP) were notable as growing uncertainty within the FOMC was apparent in the downgrades of their outlook for both 2025 and 2026 (RBC Economics also recently downgraded our US outlook). What stood out within the SEP was the skew to their assessment of risks – the number of FOMC participants reporting higher uncertainty increased across every forecast, with 18 participants reporting downside risks to GDP growth in 2025 (vs 5 in December), 16 participants reporting upside risks to the unemployment rate in 2025 (vs 8 in December), and 18 participants reporting upside risks to core PCE inflation in 2025 (vs 15 in December). While their forecast does not explicitly represent a shift towards a stagflationary outlook, the direction of risks is certainly pointing that way. Still, the Fed projections continued to show two cuts to the federal funds rate in 2025. When pressed on a justification for the downgrade to the economic outlook while making no changes to their interest rate forecast, Powell responded “It’s really hard to know how this is going to work out.”

The Fed continues to point to hard data as its guiding light

Indeed, the hard data agrees with the Fed’s assessment that the economy remains on solid footings, including a low unemployment rate, continued progress towards 2.0% inflation, and healthy GDP growth. Powell noted in the press conference “We do see pretty solid hard data still. So growth looks like it’s maybe moderating a bit. Consumer spending moderating a bit but still at a solid pace. Unemployment is 4.1%. Job creation most recently has been at a healthy level. Inflation has starred to move up now. We think partly in response to tariffs and there may be a delay in further progress over the course of this year… Overall it’s a solid picture.”

Soft data is adding to uncertainty as the Fed waits for clarity on trade policy

Powell did suggest tariffs were party responsible for some of the rise in core goods and sticky inflation seen in the first two months of 2025. When pressed further on the extent to which the SEP reflected tariff risks, he explained there were a range of possible outcomes, and ultimately the pass-through to consumer inflation will be uncertain even after the April 2 announcements. When asked about how recent survey data reflected rising inflation expectations, Powell acknowledged the impact of uncertainty, but questioned the predictive power of the soft data and forecasting economic activity. “The survey data, both household and businesses show significant rise and uncertainty and significant concerns about downside risks. So how do we think about that?… the relationship between the survey data and economic activity hasn’t been very tight. There are times people are saying very downbeat things about the economy and then going out and buying a new car… We will be watching very carefully for signs of weakness in the real data.”

We expect the Fed will remain on pause until the hard data forces their hand

We continue to monitor the yellow flags that have emerged over the past month including weaker (‘soft’) sentiment data, higher inflation expectations, mounting consumer debt alongside anemic housing market activity. In particular, we are focused on long end yields and how the housing market could respond to changes there. For now, (hard) data dependence will inform the Fed’s next move. We continue to expect the Fed will stay on pause throughout 2025. As Powell reminded us today, he remains confident that the Fed is “well positioned to move in the direction we will need to move.” But a key question for economists and markets alike is how might the Fed’s inability to provide a clear path forward start to crack those solid footings of the US economy.

Mike Reid is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

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