Catch up on more than 40 detailed earnings reviews from this season here.

The Fed Funds rate was held steady at a range of 4.25% to 4.50%. More interestingly, balance sheet runoff, for treasuries specifically, will slow starting next month. Passive quantitative tightening (QT) is now diminishing in response to “some tightness in money markets.” This should help overall liquidity and credit spreads for capital markets. As a reminder, “passive” QT means letting bonds mature without directly replacing them. “Active” QT means openly selling assets pre-maturity. Specifically, following reducing its balance sheet by $2 trillion, the Fed will cut the pace of treasury asset runoff from $25 billion per month to $5 billion. Notably, mortgage-backed asset runoff will remain at $35 billion per month, as the Fed is determined to hold mainly treasuries over the long haul.

In terms of subtle changes to the Fed statement, language surrounding higher levels of uncertainty was loud and clear. They also removed the part of the statement saying risks to the dual mandate are well-balanced, but this is based on heightened uncertainty rather than observed data. Their visibility is never great, but it’s especially foggy today.

Updates to economic projections were based on a “net impact” of four different variables. New trade policy, tighter immigration, fiscal budget cuts and lower regulation. Trade policy is a negative risk for both inflation and output; immigration is mainly a negative risk for output; fiscal budget cuts are a negative risk for output and a positive factor for inflation; lower regulation should be positive for deflationary growth. These were the main ingredients impacting changes to forecasts.

Specifically, the Fed lowered its 2025 GDP forecast from 2.1% growth to 1.7%. 2026 was revised from 2.0% to 1.8%, 2027 was revised from 1.9% to 1.8% and long-term targets were kept at 1.8%. He also added that economic activity continues to “expand at a solid pace” and consumption remains resilient. Consumer spending has slowed since the 2nd half of 2024, but it’s still healthy. Powell sees things weakening from a point of great to fine… not from fine to bad. This, to me, means falling GDP assumptions for 2025 are largely related to tariff-based import front-loading. People are trying to get ahead of these taxes. I discussed this in the “My Macro View” piece at the start of the month.

For 2025 inflation, core PCE projections rose from 2.5% to 2.8%, as progress is expected to temporarily level off this year amid tariff risks. Notably, 2026 and 2027 core PCE projections were held at 2.2% and 2.0%, respectively. No change since December — despite the rampant flow of geopolitical headlines. More later. Unemployment rate projections for 2025 gradually rose from 4.3% to 4.4%, which is still comfortably in full employment territory. No change to 2026 or 2027 unemployment rate projections of 4.3%.

Lastly, for Fed rate projections, members continue to expect 2 cuts this year and two cuts next year. Some were worried about cut expectations falling to 1 for 2025.

There were three pieces of Powell’s press conference that I think investors are excited about. First, the highly publicized federal layoffs are having zero material impact on national hiring data. The labor market remains well-balanced, wage inflation is at sustainable, healthy levels and the pace of hiring has been resilient. The private sector, as I’ve been saying, is well-equipped to handle this small unemployment shock. Great news for investors and for folks affected by the layoffs. This makes me smile.

Next, tariffs are not expected to have a lasting inflationary impact beyond this year. Again, this was a big reason for keeping rate expectations unchanged and was the most important part of the event in my view. Every single voting member baked implemented tariffs into updated PCE forecasts. As we can see from updated projections, they think tariffs will have a small, temporary impact on higher inflation only for 2025. Just like during the trade war under this administration’s first term, these inflationary forces are not expected to be at all structural. That is what played out then and that is what is expected today. That’s their base case. “Well-anchored” survey and market-based long-term inflation expectations mesh very well with this point of view.  The 5-year TIPS and breakeven rates that he cited in the presser (which was used as my evidence in My Macro View article) tell me he’s absolutely right. This context is why tariffs didn’t lead to fewer rate cuts expected over the next two years.

Lastly, Powell thinks some of the sentiment-based data is not based in reality or hard, structural economic data. Sentiment-based (or “soft”) data from various household and business surveys looks a lot worse than what is actually playing out in the economy. And that’s somewhat normal. Soft and hard data are not strongly correlated like one may think. Nobody has a crystal ball. All macro-risks right now are related to sentiment and anxiety. Powell has not seen deterioration in hard data. They are not seeing concerning consumption weakness play out (GDP declines again due to import front-loading). They’re looking very closely for cracks in the foundation. None yet, per Powell.

I think Powell’s willingness to look through tariff-based inflation, as well as the employment and output commentary, will be applauded by markets. We saw that play out today.

Nothing has changed about my macro thoughts since the article I sent a few weeks ago. That piece spells out why I’ve made the portfolio moves I’ve made this month and what I expect to play out this year. My mind is wide open to new data altering my point of view, but that has not happened. At least not yet. I am very comfortable having about 30% of my emergency savings cushion left to deploy. I remain upbeat about the structural economic backdrop (when zooming out) and also know we are not through the headline risk just yet. I love the idea of having deployed most of my bullets, and leaving 1-2 more just in case things again get hectic. That’s entirely possible.