In this week's economic update, we're examining the recent U.S. Federal Reserve policy decisions and commentary, and unpack what this could mean for the short and long-term for the U.S. economy. In particular, we will be looking at the updates to the Fed's near term forecast and what potential outcomes these moves point to.
We'd also like to share the details of tomorrow's financial literacy webinar. Tomorrow March 26th at 11am, our own Elvis Henrique (Senior Wealth Planning Specialist) and our colleague Stephanie Dean (Manager, Financial Literacy, RBC Wealth Management Family Office Services) will be discussing the tools and strategies for preparing the next generation for future wealth.
Economic Update
Global markets have benefited from the lack of trade-related noise over the past few weeks, with markets outside of the U.S. continuing to outperform year-to-date. Despite the relative calm on the tariff front, there were important developments elsewhere. Notably, another interest rate cut by the Bank of Canada, the appointment of Mark Carney as Canada’s Prime Minister, and reports that a federal election will take place next month.
Overseas, a partial ceasefire was negotiated between Ukraine and Russia. Meanwhile, some budget changes were approved in Germany that set the stage for a significant increase in military spending and infrastructure investment. We plan to discuss these over the weeks to come.
In this week’s economic update, we address the U.S. Federal Reserve’s latest update, which pointed to some ‘stagflationary’ effects (where growth slows, and inflation rises) this year.
U.S. Fed updates near term forecast, but longer-term remains unchanged
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.
U.S. Fed – Potential inflation described as ‘transitory’
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.
Most suitable approach for the Fed may be to stand put
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 over-commit 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.
Summary
As a general rule, investors tend to get more enthusiastic about investing opportunities when negative sentiment is at an extreme and valuations are cheap. We continue to proactively monitor the situation and how any of these factors could impact our clients’ portfolios – as well as preparing for any investment opportunities that market conditions present – while continuing to maintain a long-term investment perspective.
Financial literacy webinar: Preparing the next generation
We are hosting a 30-minute financial literacy webinar this Wednesday March 26th at 11am, where we’ll be discussing the tools and strategies to prepare your kids for the future - to steward and protect your family’s wealth legacy.
In this webinar, our own Elvis Henrique and colleague Stephanie Dean (Manager, Financial Literacy, RBC Wealth Management Family Office Services) discuss several core questions around preparing the next generation for the future.
You can register for the webinar by clicking here.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
