The U.S. Federal Reserve kept interest rates unchanged at its recent meeting. Nevertheless, it revised a few of its economic projections. Its forecasts for economic growth (i.e. GDP) were revised lower: to 1.7% (from 2.1%) for 2025, and to 1.8% for both 2026 and 2027, respectively (from 2.0% and 1.9%, previously). Meanwhile, its inflation projection for this year was revised higher, to 2.7% from 2.5%, but its estimates for 2026 and 2027 were left unchanged. In summary, it expects lower growth through the next few years, and a temporary bump in inflation this year before it reverts to lower levels. The Fed also revealed that, on average, its policy makers expect two interest rate cuts this year, followed by two more in 2026, and one in 2027, which was unchanged from its prior assessment late last year.
The Federal Reserve’s official statement suggested it felt that U.S. economic activity was “solid”, with a healthy labour market, and inflation that remained “somewhat elevated”. It acknowledged that uncertainty had risen, and it was paying close attention to the risks of both sides of its dual mandate: unemployment and inflation.
Chairman Jerome Powell’s comments during his press conference were more interesting, in our view. He acknowledged some slowing in consumer spending, recent deterioration in sentiment, and higher levels of uncertainty resulting from a U.S. government that is making big changes in policy. But he reminded people that the U.S. economy was at least starting from a position of strength. Meanwhile, he was less concerned about an uptick in consumer inflation expectations and characterized any potential inflation stemming from tariffs as “transitory”. The latter remark was not particularly comforting as he also used the same term to describe inflationary pressures that emerged during the early stages of the pandemic.
Our simple takeaway is that the Fed is nearly as uncertain over the trajectory of the U.S. economy as everybody else. It is hard to fault them as government policy has been erratic through the first few months of the year. As a result, the Fed now finds itself in a more difficult position where growth is slowing, and inflation is rising. A recent RBC report compared the Fed’s position as being akin to a goalkeeper trying to save a penalty kick in football (i.e. soccer). If they overcommit to one side, they increase the odds of saving the economy from that scenario (i.e. slower growth), but it may then become more difficult to prevent the other scenario (i.e. higher inflation) from unfolding. As a result, a more suitable approach may be to stand pat, which is what they are doing for now.
We are not necessarily standing still. Given a more cautious mindset, we continue to review portfolios, ensuring that asset allocations are in-line with the targets set in our investment policies and financial plans. As a general rule, we tend to get more enthusiastic about investing opportunities when negative sentiment is at an extreme and valuations are cheap. The sentiment side, while not yet at an extreme, has turned more negative this year, but valuations still have a way to go in our view.
Should you have any questions, please feel free to reach out.
Beth Arseneau, FMA, CIM
Portfolio Manager
416-960-4592
beth.arseneau@rbc.com
