For the second meeting in a row, the Federal Open Market Committee (FOMC) decided to keep rates unchanged, leaving the Fed Funds trading range at 4.25%–4.50%. An important point to remember given the current investment backdrop is that this level for overnight money is still 100 basis points below where it was prior to the beginning of last autumn’s rate-cutting process. The decision to keep Fed Funds at the current level came as little surprise, as the Fed appears to be sitting back and waiting to see how the economic and inflation landscape unfolds given the uncertainties that have arisen from Washington, D.C. policy considerations. Needless to say, it is not just the Fed, but also the markets, that are in wait-and-see mode.

As I mentioned, the outcome of the March FOMC meeting was widely expected. Indeed, Powell & Co. had been clearly expressing their opinion that the uncertainties surrounding topics such as tariffs and federal government cost-cutting had placed a cloud of sorts over the economic and inflation outlooks. Interestingly, it does not appear as if this cloud will be removed any time in the near future either.

So, that leaves us to consider how the key macro factors look heading into this period of uncertainty. Here in Q1, investors have seen official real GDP forecasts coming in all over the place. For example, the Atlanta Fed’s GDPNOW forecast has gone from a +2.3% projection at the end of February to -2.4%, as of this writing, owing to a surge in imports, which may have been just a front-loading phenomenon to avoid potential tariffs. Meanwhile, the N.Y. Fed’s own Nowcast sees Q1 real GDP at +2.7% in its latest report.

While recent economic data did provide somewhat of a mixed bag, the labor markets still seem to be on relatively solid footing. Perhaps most noteworthy on that front was the leading indicator, jobless claims. The level of claims still remains about 100,000 below where it had been before prior recessions over the last 40 years.

Interestingly, Chair Powell recently stated that the “economy is fine” and “doesn’t need us to do anything.” Therein lies the rub as far as the money and bond markets are concerned. In other words, incoming data is yesterday’s news, and what’s more important is what future economic/inflation reports will bring. This is where the Fed appears to be at as well, i.e., dependent on data and D.C. policy.

As expected, the Fed made an adjustment to their quantitative tightening (QT) policy where they scaled back the pace of balance sheet runoff. The policy makers have already tapered their pace of balance sheet reduction, so it appears it is now a question of when, not if, to end QT in the months ahead.

The Bottom Line

While market expectations for future rate cuts are more than likely going to continue to change, fixed income investors can position their portfolios to navigate the cloud of uncertainty by using an active/passive barbell strategy.