After implementing 100 basis points (bp) of interest rate cuts in late 2024, Federal Reserve Chair Jerome Powell has indicated that the Fed is in no hurry to ease policy further. While a rate hold is widely expected at the upcoming March 19 meeting, President Donald Trump’s spending cuts and trade protectionist policies are weighing on growth prospects, potentially forcing the central bank’s hand in the second half of 2025.
The Economy Isn’t Living Up to Expectations
At the start of the year, optimism ran high. Many expected Trump’s return to the White House to turbocharge growth through tax cuts and deregulation. However, his administration’s **initial focus on government spending cuts and trade protectionism** has dampened expectations.
Concerns are rising about job losses, particularly among federal workers and government contractors. Simultaneously, escalating tariffs—intended to reshore manufacturing—are raising fears of **higher consumer prices and squeezed corporate profit margins**. Reciprocal tariffs from global partners and potential consumer boycotts could further strain US exports.
Fed Remains Cautious Amid Cooling Growth
Disappointing economic data and persistent trade tensions have dampened investor sentiment. While recession fears are growing, Powell has played down these concerns, stating in a **March 7 speech** that the U.S. economy remains in a “good place.”
The Fed is expected to largely maintain its previous **December 2023 projections**, signaling **two 25bp rate cuts** for 2025. With unemployment still low and inflation above target due to tariff-driven price increases, the Fed has no pressing need for further cuts in the near term. However, as housing inflation cools in late 2025, this could open the door for **additional rate cuts in September and December**, followed by another in **March 2026**.
Treasury Market Watches Quantitative Tightening
Markets are also closely watching the Fed’s approach to **Quantitative Tightening (QT)**. Despite Powell’s vague remarks in the last FOMC meeting, meeting minutes confirmed that QT was a key discussion point.
At the current pace, **bank reserves could drop to $3 trillion by mid-2025**, nearing the threshold where the Fed may feel compelled to halt QT. When QT ends, the Fed will resume **purchasing Treasury securities**, injecting more liquidity into the market.
Implications for the US Dollar
If Powell successfully **calms recession fears** and reaffirms expectations for **just two rate cuts in 2025**, the **US dollar could strengthen**. However, this could put additional pressure on **US stocks and exports**.
The EUR/USD rally has been fueled by weaker US economic data and a dovish Fed outlook. If Powell signals confidence in growth, **the dollar may regain strength**, particularly against the Japanese yen, Scandinavian currencies, and even the euro.