March 2025 FOMC Preview: Not in a hurry to get worried
The desk anticipates a neutral stance from the Federal Reserve at the upcoming March FOMC meeting, reflecting a lack of urgency to adjust interest rates despite recent market volatility. Per the full note from MUFG EMEA, George Goncalves emphasizes that the Fed is not inclined to react hastily to tightening financial conditions. This perspective aligns with our view that the Fed will maintain its current policy framework, allowing for a more stable outlook in the FX markets. With no high-impact events on the calendar in the next 30 days, traders should focus on the implications of this neutral Fed stance on currency pairs, particularly the USD's performance against major currencies.
What the desk is arguing
MUFG's George Goncalves expects the Fed to deliver a neutral message at the March FOMC meeting, emphasizing that policymakers are "not in a hurry" to cut rates. The recent market volatility and tightening financial conditions are not viewed as sufficient to shift the Fed's cautious stance.
Goncalves believes the current environment does not warrant immediate action, as the Fed remains focused on inflation risks and economic resilience. This view implicitly rejects the narrative that recent volatility could force the Fed into a dovish pivot.
Where it sits in our coverage
We maintain a Eurozone-focused coverage, and while this FOMC analysis does not directly address EUR/USD, the neutral Fed stance broadly aligns with our expectation that the Fed remains on hold through early 2026. Our consensus target for EUR/USD at December 2026 is 1.12, with a spread of 1.04-1.18.
From our per-firm coverage, Goldman Sachs targets 1.15, JPMorgan targets 1.10, and Barclays targets 1.08, all for year-end 2026. MUFG's neutral view is consistent with these targets, as a patient Fed supports a gradual dollar depreciation scenario.
How other firms see it
The neutral-Fed consensus is broadly held. Standard Chartered similarly expects no rate cuts in H1 2025, aligned with MUFG. Deutsche Bank also sees the Fed on hold, emphasizing inflation persistence.
Contrary views include Bank of America, which argues the Fed may need to cut earlier due to economic slowdown, and Citigroup, which sees a cut as early as June 2025 if financial conditions tighten further.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed to signal neutral stance at March FOMC, no rush to cut rates.
- 02Recent market volatility not enough to trigger policy shift.
- 03Consensus among major banks aligns with patient Fed view.
Market implications
A neutral Fed supports USD stability in the near term, with gradual depreciation expected as data evolves. EUR/USD may trade within 1.06-1.10 range ahead of FOMC.
Risks to this view
Downside risk: if labor market weakens sharply, Fed could pivot dovish sooner, boosting EUR/USD. Upside risk: inflation reacceleration could force hawkish tilt, strengthening USD.
Welcome to the MUFG Global Markets Podcast. I'm John Cook, and I'm joined today by George Goncalves, MUFG's Head of U.S. Macro Strategy.
It's Tuesday, March 18th, 2025. Welcome back to the podcast, George. Great to catch up with you, John.
Yeah, you too. Let's get right into it. So in the last Macro to Markets Monthly titled, appropriately, I would argue, the Ides of March, you stressed that market participants should not dismiss the volatility that was brewing at that time in February, and that this challenging backstrop would likely linger well into March.
Certainly turned out to be true, and I would argue an understatement. Given the market's dramatic moves in the past few weeks, are you anticipating the markets, you know, chop around further into a new lower range of presumably like in, I guess, for both stock prices and treasury yields, but perhaps for treasury yields primarily? Do things bounce?
Does risk sentiment bounce? Or do you get some sort of further risk off move? And if so, I guess, how ugly does it get?
Yeah, no, John, I think it's important to take a step back in two things. One, understand where we came from. Two, differentiate between, you know, the move and equities and overall risk assets within.
And even within there, there's credit, which only eventually started to get impacted. And then kind of compare that to what took place in rates. You know, starting with rates first, rates have been on decline.
And we saw the peak in early January with the 10-year at 479, didn't last long at that high levels of rates, got into like a slightly lower range, let's call it 425, 450, and chopped around for quite some time until we finally got the catalyst, which was the uncertainties on the growth outlook, concerns around the tariff policies that were being implemented, which kind of feed off each other and compound each other. But it was really the risk markets that were driving things more so than the rates markets. Rates markets had taken out a lot of the cuts and then put them back in, but it's nothing really new for us.
We're typically, or at least in the rates markets, we're the recipients of the flight to quality type flows. And so all of that kind of matched out. I think what's really unique in this instance is more the actual, you know, the bigger downdraft in equities, you know, for the better part of 18 months, if not longer, it was like a one-way train up into the right.
And we really didn't see downdrafts and declines greater than 5%. And so I think that's the bigger shock and relative to the trend line, the sell-off feels like three times worse than it really is, largely because of this nonstop rally that we've been in, in risk assets. And so I think it's more getting a better grasp on like what lies ahead for risk markets and volatility also popped higher after being dormant for quite some time, especially with the low VIX, but now we have a higher VIX.
The question really is, have we seen it all? Is it enough? I mean, we've seen bounces before.
We've seen markets get oversold and then kind of turn around and get back on trend. I think what's different this time is that the catalysts that are driving this uncertainty like trade policy and just concerns about valuations, where we are in the business cycle, I don't think those concerns go away that easily. So I do think that we're probably in for this kind of slightly lower range susceptible to these kind of bigger downdrafts around headline risks until we get a better understanding of what the rules of engagements are and we get more information on both the labor market and where we truly are in the business cycle.
So I do think that this is most likely the start of a bigger move that probably persists into the summer until we get resolution on fiscal policy and trade policy. Again, nothing ever goes down a straight line, but I do think that this is not one of those typical sort of just minor corrections. Okay.
So not to put words in your mouth, but it sounds like there's in your mind, at least there's a good possibility that this gets worse before it gets better. And to put a little context around this podcast episode, we're recording it on Tuesday, day one of the FOMC meeting, but the day before when the statement is released and you get the summary of economic projections and Chair Powell's post-meeting press conference. You recently published a preview on that meeting titled, Not in a Hurry to Get Worried.
And you highlight in that piece that the Fed will try and convey a more neutral message to avoid triggering more volatility, which certainly makes sense, given what you just spoke of. I'd be curious what specifically though that means, like how exactly do they convey a more neutral message? How do they walk that tightrope, if you will?
Also given what I would characterize as very legitimate concerns over growth, the labor market, but also inflation, which certainly potentially puts the Fed in between a rock and a hard place. How long can the Fed really stay on the sidelines here? That is the trillion dollar question and it comes in various forms and it is going to be like walking a tightrope.
The Fed so far has gotten lucky in the sense that they are not the main point of focus right now. The focus is again on fiscal policy, trade policy coming out of DC and also just kind of global activities. There's been a number of things that have happened both in China with stimulus and the big fiscal package that we'll see if it gets through in Europe, out of Germany.
So there's been other kind of themes working in parallel. And so in many ways, the Fed's kind of taken a backseat and hasn't been the main focus. I don't think they can do that for long.
For this meeting, though, and the reason why we kind of dubbed the title not in a hurry to get worried, the Fed doesn't want to be a source of volatility. They want to kind of just convey the message that they're still confident on the outlook, that the economy is still solid enough to kind of weather this recent volatility as long as it doesn't get any worse. I don't think they want to raise any eyebrows and concerns that they're worried about financial conditions tightening.
So in many ways, they were kind of perplexed for years after hiking so much that there wasn't tightening of financial conditions. So in many ways, this is par for the course, maybe not the way that they thought we would get to it. But I think that this is probably the wrong meeting to get terribly concerned.
But at the same time, though, I mean, they are watching what the markets are doing, and they do factor that into their sort of growth outlook. So we do expect them to take down their estimates a little bit for the latter years. And I think they're going to convey the neutral message by keeping the dots the same.
In December, they had their last SEP forecast updates with two cuts for 2025. I think the bar is high for them to suggest three. I don't think they're going to go down to one because that would really be too hawkish.
So staying at two makes a lot of sense. Remember, just a couple of weeks ago before this swoon in risk markets, there were a number of folks out there that were saying that the Fed was not going to cut at all, and the market has priced in at times close to three or more cuts and now somewhere around 2.5. If they kind of thread that needle and the dots don't really change, and Powell continues to deliver a kind of constructive message that we'll get through this kind of volatile period and that it's not enough to derail things, I think that's the best that they can do at delivering a neutral message.
If further down the road, if the growth outlook were to get challenged based on this volatility, they could change their tune in May and June. We do have, again, as a house view, them cutting in June exactly for those reasons, because at some point they can no longer avoid what's taking place in the broader economy. The consumer is getting weaker and what's happening with imports and exports and just the disruptions around there will lead to less growth in the first half of the year and they're going to have to cut.
But I'm not sure if they want to convey that now. They have some time ahead of them to get more proof in the data. And I guess the one dovish thing, which I kind of lean towards the dovish side, typically, as you know, and our readers will know, at least when it comes to monetary policy, is that there's been talk and it was mentioned in the minutes where they might change the quantitative tightening of the QT.
So that's maybe the one possible piece of news that comes out the official end of QT. It's either, we think it's either at this month or May. Hey, George.
Yeah, that all sounds pretty reasonable. I guess as a follow up question, what about inflation? So it sounds like you're kind of of the mind that this is not the meeting for the FOMC to sound the alarm bell.
It makes sense to me. I certainly think that would rock markets, but they might be in a position after the economy slows down a little bit or maybe the labor market shows some weakness to cut rates later in the year. I think there's obviously a part of the overall markets worry about elevated inflation.
How does that play out in the main scenario? Yeah, so I think they can address that and they have been addressing that over the last few quarters by lifting up the neutral rates, or at least their estimates of what the long run rate should look like when they finally finish normalizing policy. So there's some risk that that might go up slightly.
It's currently at 3%. It could go up to three, three and an eighth, even three and a quarter, but maybe it's not so soon at this meeting, but over time they might acknowledge that you need to run slightly higher rates because of the more, you know, just inflation having a harder time getting down towards the neutral and also because just more confidence that eventually once we get through whatever period that we're going through now, that growth will still be robust enough to keep rates at neutral or higher. I think they can deal with that later on.
Yeah, that makes sense. I mean, I guess, you know, some concerns about elevated inflation aren't necessarily going to get in the way of the Fed cutting later this year, maybe a couple of times later this year, but it could end up, could get in the way of the Fed taking rates materially lower. So that makes sense to me.
Again, we covered a lot of ground here and accordingly I would encourage our listeners to check out the appropriately titled Macro to Markets Monthly, the Ides of March, as well as the FOMC preview, Not in a Hurry to Get Worried. And if you are still not receiving George's strategy reports, do check out the MUFG Research Portal at www.mufgresearch.com where you can find all of your favorite MUFG research, as well as sign up to have it conveniently delivered right to your inbox. George, great stuff as always.
Thank you. Thanks, John. And thank you for listening to the MUFG Global Markets Podcast.
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