On March 19, 2025, the Federal Reserve released its updated economic projections, revealing a cautiously optimistic tone tempered by the prevailing uncertainties surrounding inflation, growth, and the labor market. As markets dissect the implications for interest rate policy, the new Summary of Economic Projections (SEP) and the dot plot give traders a fresh lens through which to evaluate the Fed’s reaction function for the rest of 2025.
Key Economic Forecasts from the FOMC
- GDP Growth: Slight Upward Revision
Real GDP growth is projected to rise by 2.1% in 2025, a modest improvement from the 2.0% forecast in December. The upgrade reflects continued resilience in consumer spending and a rebound in business investment, despite global headwinds and tighter credit conditions. Growth is expected to moderate to 1.9% in 2026 and 1.8% in 2027, aligning with the Fed’s longer-run trend estimate of 1.8%. - Unemployment Rate: Holding Steady
The Fed anticipates the unemployment rate will hold near current levels, with a 2025 forecast of 4.0%, gradually ticking up to 4.1% in 2026 and 4.1% in 2027. These projections suggest a labor market that remains tight by historical standards but is expected to loosen slightly in the medium term. - Inflation Outlook: Gradual Convergence
The Fed’s preferred inflation gauge, core PCE (Personal Consumption Expenditures excluding food and energy), is expected to decline to 2.6% in 2025, before edging closer to target at 2.2% in 2026 and 2.0% in 2027. Headline PCE is projected at 2.4% in 2025. The slight revisions signal the Fed’s confidence in disinflation continuing—albeit not linearly.
The Dot Plot Speaks: Fewer Cuts Than Hoped
The March dot plot revealed a recalibrated rate path:
- Median projection for the Fed Funds Rate at end-2025: 4.4%
(Only 2 cuts projected this year, versus 3 previously) - 2026 median rate: 3.6%
- 2027 median rate: 3.1%
- Long-run neutral rate: 2.6% (unchanged)
This signals a slower pace of easing than previously anticipated. Notably, some members still favor a higher terminal rate if inflation proves sticky.
What This Means for Markets
- Dollar Outlook: The less dovish dot plot supports a firmer dollar in the near term, especially against currencies from central banks with more aggressive easing paths.
- Equities & Bonds: Equity markets may be disappointed by the dialed-back rate cuts. Treasury yields remain rangebound as traders price in fewer cuts and a “higher-for-longer” narrative.
- Gold & Commodities: With real rates remaining elevated, gold faces headwinds unless inflation surprises to the upside.
Bottom Line
The March SEP affirms the Fed’s wait-and-see approach. Policymakers appear willing to cut rates but are not ready to commit prematurely amid persistent inflationary pressures. For traders, the message is clear: don’t fight the Fed, but don’t expect a sharp pivot either.
Upcoming data—particularly on core inflation and wages—will remain key drivers for the Fed’s next moves. Until then, the current projections serve as a roadmap of cautious optimism, anchored in realism.
📌 Prepared by Vito Henjoto – Market Analyst
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