- US: Fed kept the Fed Funds rate constant at 4.5% during March FOMC meeting; GDP growth projections were revised downward, while inflation forecasts were raised, signalling a stagflation outlook
- Germany: Improved growth expectations following a proposed increased fiscal spending, infrastructure and defense fund
- Japan: BOJ kept target rates constant at 0.5% during March meeting, well below the average CPI of 2.9%, indicating further normalisation ahead
- Rates: Fed will not have sufficient reason to adjust rates or significantly tweak the Summary of Economic Projections; market not expecting cut this week but is pricing in 2-3 cuts this year
- China: Economic recovery in various sectors such as retail and industrial production, despite uneven growth
US: Fiscal troubles and worsening growth momentum. US public sector debt burden, at 121% of GDP, is at an uncomfortable level, as is the fiscal deficit, at 7.5% of GDP. US authorities are keen to tackle this, as seen in the flurry of government worker firings and cancellation of projects. Despite a sharp rise in recent years, US public sector spending as a share of GDP is much smaller than it is in Europe or among the G20 nations. The key issue is the sub-30% of GDP revenue ratio in the US. Solving debt and deficit issues in a sustainable manner would entail raising taxes, which unfortunately is highly unlikely.
Presently, there is a remarkable macro divergence at play among key economic blocs. The US economy is showing signs of slowing amid great policy uncertainty. Europe, faced with a historical weakening of its alliance with the US, is ramping up spending. China, after years of property market distress and external challenges, is finding its feet with a decisively supportive fiscal/monetary/structural policy agenda. But the overarching theme is the worsening of growth momentum in the world’s largest economy.
Growth slowdown worries are justified, but that does not guarantee substantial Fed rate cuts this year. Two factors complicate that picture. First, inflation is already sticky and would face mounting upsides as tariffs and immigration tightening measures are combined with tax cut-driven fiscal impulse in 2Q. Second, despite all the DOGE-related headlines, the chance of a meaningful improvement in the fiscal picture is slim. The planned cuts in the federal budget barely scratch the surface in bringing the deficit down, with tax cuts in the pipeline likely to overwhelm any likely savings.
At the FOMC meeting, Fed kept the Fed Funds rate on hold at 4.5%, reducing the monthly QT cap to USD40bn (USD5bn for USTs and USD35bn for MBSs) while delivering an uncertain outlook for the economy. The upshot is that the Fed is not in a rush to adjust settings if things are not clear. This stance is reflected in the unchanged median dot-plot across all time frames. That said, the SEP indicates stagflation hues.
Compared to December, the 2025 GDP growth projection was nudged lower (1.7% versus 2.1% previously) while core PCE inflation was pushed higher (2.8% versus 2.5% previously). Digging deeper, the risk skew towards a higher unemployment rate and higher inflation is apparent amongst Fed members. This probably also accounts for a slight hawkish tilt in the dot-plot (more members seeing less cuts) even as the median was left unchanged. To top it off, Fed Chair Powell indicated that tariff-inflicted inflation should be seen as transitory.
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