Policymakers need to weigh the trade-offs between "slowing growth" and "sticky inflation," as well as whether to hedge against "Trump uncertainty" in advance.

Author: Pretending to be on Wall Street

Signs of recession have begun to appear, and in the current climate of financial market anxiety, Fed officials are certainly aware of this. Therefore, the core contradiction of the March FOMC meeting lies in the need for policymakers to balance "slowing growth" against "sticky inflation" and whether to hedge against "Trump uncertainty" in advance.

If the meeting signals include "lower inflation tolerance + later rate cuts" while ignoring the chaos brought by Trump's fiscal policies and tariffs, this could lead to declines in U.S. Treasuries, U.S. stocks, and the cryptocurrency market, with the dollar strengthening in the short term; (Of course, I believe the probability of gathering these hawkish elements is very low.)

Conversely, if the Federal Reserve believes that current inflation is driven by temporary factors (such as tariffs and supply chains), or if it considers the risk of economic recession to be greater than the risk of inflation, thus tolerating inflation temporarily above the 2% target, or triggering expectations for earlier rate cuts, this would be favorable for risk assets.

Additionally, if the Fed is overly concerned about economic growth, even with expectations of easing, it could lead to short-term panic in the market, resulting in chaotic fluctuations.

Here are the specific points to pay attention to:

1. Interest Rate Decisions and Policy Stance

Whether to maintain interest rates unchanged:

All institutions unanimously expect the Federal Reserve to keep the federal funds rate target range at 4.25%-4.50%, continuing the stance of "not in a hurry to act," so there should be no surprises here. If there is a surprise, just close your eyes and go long.

Policy statement wording:

Pay attention to whether the statement adjusts its assessment of economic growth, inflation, and risk balance (e.g., shifting from "strong growth" to "moderate slowdown"), and whether it retains the wording of "patience." Note whether officials downplay the rising unemployment rate while still emphasizing a tight labor market.

If the statement emphasizes the stubbornness of inflation, it may suppress risk assets; if it downplays inflation growth risks, it could boost the stock and cryptocurrency markets.

2. Economic Forecast Adjustments (SEP)

Growth and Unemployment Rate:

Wall Street expects Federal Reserve officials to slightly lower the GDP growth rate for 2025 (from 2.1% to 2.0%), reflecting the drag from trade policies and slowing consumption, while the unemployment rate may remain low (4.3%).

Inflation Path:

The last forecast for core PCE inflation was 2.5%. If officials consider the transmission of tariffs and wage stickiness, it may be revised upward, which is a bad signal.

Additionally, it is important to monitor whether long-term inflation expectations are "unanchored" (e.g., the latest University of Michigan inflation expectations jumped to 3.9% as a warning).

Market Impact: If the GDP growth rate is lowered and the core PCE inflation forecast is revised upward, it would indicate a warming expectation of stagflation, potentially suppressing risk assets and benefiting gold.

3. Rate Cut Signals from the Dot Plot

Median number of rate cuts in 2025: Current market expectations are for two cuts (25 basis points each), and it is necessary to observe whether this remains the same, decreases (to one), or increases (to three).

Long-term neutral interest rate (r): If it is believed that trade policies are raising supply-side costs, it may lead to an upward revision of r, indicating less room for rate cuts.

Degree of disagreement among committee members: Pay attention to the dispersion of the dot plot distribution; if the 2025 predictions are concentrated around 1-3 rate cuts, the policy path uncertainty is higher.

Market Impact:

Signals of stagflation have already appeared, so the core of this dot plot is to verify the Federal Reserve's tolerance for "stagflation" risks.

If the dot plot suggests fewer rate cuts (one), short-term yields may jump, negatively impacting risk assets; if more rate cuts (three) are indicated, it could boost risk appetite.

If the dot plot shows more rate cuts, it is necessary to verify whether the core PCE forecast is adjusted downward simultaneously (original forecast 2.8%). Conflicting signals (more rate cuts + higher inflation) will lead to market chaos.

4. Adjustments to Quantitative Tightening (QT) Plans

Balance sheet reduction pace:

Adjustments to QT may include slowing the pace of balance sheet reduction or pausing the reduction of MBS (currently reducing by $35 billion per month).

Reinvestment strategy:

Pay attention to whether MBS repayment funds are reinvested in Treasuries proportionally (neutral strategy) or skewed towards short-term bills, which may exacerbate short-term distortions, especially since the debt ceiling has led to a reduction in bill issuance. If reinvestment leans towards neutral or long-term bonds, it may lower long-term yields and alleviate term premium pressure, which would be an additional benefit.

Market Impact:

This could be the potential biggest benefit of this meeting; if a clear QT end timeline is established or if market liquidity pressure expectations are alleviated, it may favor a rebound in risk assets.

5. Trade Policy and Inflation Risks

Tariff impact assessment:

Will the Federal Reserve mention the bidirectional impact of trade policy uncertainty on growth and inflation in the statement or press conference (some institutions expect tariffs may raise core PCE by 0.5 percentage points)?

Will it hint at concerns over "stagflation" risks (the market has priced in recession, but the Fed is more focused on inflation)?

If inflation expectations spiral out of control, will it release hawkish signals of "raising rates if necessary" (low probability, but needs to be monitored)?

Market Impact:

If the Fed emphasizes sticky inflation, real interest rates rising may suppress gold; if it acknowledges stagflation, risk assets may be sold off. If inflation is controllable, it will be a wait-and-see approach.

6. Debt Ceiling and Fiscal Policy Risks

Government shutdown risk:

The debt ceiling deadlock remains unresolved; pay attention to whether the Federal Reserve hints at liquidity support measures in advance (e.g., adjusting the SRF tool), which would be positive news.

Fiscal drag:

Whether the impact of government spending cuts on economic growth is included in the SEP forecast (e.g., federal layoffs dragging down employment).

Market Impact:

The market impact here may be somewhat tricky; generally speaking, if the Fed is very concerned about chaos in the Treasury market and has a pessimistic outlook on economic growth, the market may panic sell initially, and only later will attention return to the Fed's easing expectations. Therefore, if this happens, the market may find itself directionless and experience chaotic large fluctuations in the short term.

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