Federal Reserve's future policy path 'highly uncertain' as Powell downplays forecasts on heels of Trump unknowns

Sun, Mar 23, 2025, 6:30 AM 4 min read

The Federal Reserve continued to signal it will cut interest rates two more times this year, with Fed Chair Jerome Powell adopting a perceived dovish stance, a pleasant surprise for investors who came into Wednesday's policy decision with heightened fears over "stagflation" and the possibility of a US recession.

"It's a clearing event," Dennis DeBusschere, president of 22V Research, told Yahoo Finance following the decision. "You didn't get a Fed that was going to accelerate the downside in markets."

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

One big reason stemmed from the Fed's "base case" that tariff-induced inflation will be "transitory" and have a short-term "one-off" effect on price growth. This was reflected in the central bank's projections, which forecast year-end PCE inflation rising to 2.7% before reaching its 2% target by 2027 — "a relief to investors" who had been bracing for stickier prices, according to DeBusschere.

But some experts warn that "transitory" inflation remains an unrealistic expectation — and that the projections for two rate cuts this year could unravel as the Trump administration continues to flip-flop on trade policy. Powell himself said "there is a level of inertia" to stay consistent with prior forecasts until greater clarity emerges.

"Uncertainty was a highlight of the statement," Rick Rieder, chief investment officer of global fixed income at BlackRock, wrote in response to Wednesday's decision. "Like market participants, the Fed is at a highly uncertain point, and it is in need of time and data to determine the next course of action."

Both consumer and producer inflation showed a deceleration in price growth over the month of February. But details under the surface pointed to a potential stalling out in reaching the Fed's 2% target, with tariffs serving as the greatest threat to Powell's "transitionary" base case.

There are also concerns the Fed may cut rates because of a weakening labor market and slowing economic growth — a move that wouldn't be cheered by investors.

"Everybody wants two cuts, three cuts, four cuts. You don't want any cuts. You want earnings growth. You want a strong economy," Ken Mahoney, CEO of Mahoney Asset Management, told Yahoo Finance on Thursday. "Be careful what you wish for."

Despite a slightly more hawkish tilt from the central bank, with more FOMC members forecasting interest rates to either hold steady or come down by just 0.25% instead of the consensus 0.50%, traders still boosted their own expectations of where interest rates could end the year.