The Fed’s Backdoor QE

 by James Rickards

On Monday, we offered readers the following forecast of what would happen at the FOMC meeting this week:

On Wednesday, the Fed will continue its pause in interest rate cuts. That decision will leave the federal funds target unchanged at 4.50%. The Fed’s current rate lowering cycle began with a 0.50% rate cut on September 18, 2024, followed by additional rate cuts of 0.25% each on November 7 and December 18, 2024. The pause in cutting rates began at the Federal Reserve meeting on January 29, 2025. This pause is a reflection of the Fed’s concern about rising inflation and a desire to see additional data before deciding on its next move.

Here’s What Happened

The Fed did continue the pause in its cuts in the fed funds rate as we predicted. This kept the Fed’s target rate unchanged at 4.50%. The rate pause was widely expected. The Fed does not like to produce surprises if they can possibly avoid it. This is the no drama Fed.

Here’s the text of the Fed’s press release issued at 2:00 pm EDT on March 19, 2025:

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in April, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $25 billion to $5 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

A Sign of Rate Cuts Resuming

The most significant part of this statement is the reduction in the “redemption cap” on Treasury securities from $25 billion to $5 billion. This refers to the pace at which the Fed allows its balance sheet to shrink.

When Treasury securities on the Fed’s balance sheet mature, the Fed has a choice between doing nothing (a form of monetary tightening) or rolling over the position by buying new securities (a form of monetary ease or QE). By lowering the cap, there will be more rollovers and less balance sheet reduction. That is a dovish move that indicates monetary easing – a backdoor form of QE or even a rate cut.

The FOMC vote on this policy statement was 11-1 in favor. The dissent came from Governor Christopher J. Waller who disagreed with the reduction in the run-off of the Fed’s balance sheet.

This meeting included the “dots,” technically the Summary of Economic Projections (SEP) offered by 19 Fed governors and regional reserve bank presidents and presented in graphical form as a dot plot. The dots show individual forecasts of key variables such as unemployment, interest rates, inflation, and economic growth. The dots do not deserve serious attention as forecasting tools. The Fed has the worst forecasting record of almost any institution.

That said, the dots did include some significant developments. The SEP lowered its inflation expectations and reduced its 2025 U.S. growth forecast from 2.1% to 1.7%. The SEP also kept the unemployment forecast unchanged. Taken in combination with the decision to reduce the run-off in the balance sheet, this is a slightly dovish turn of events. It certainly strengthens the case for a rate cut at the Fed’s next meeting on May 7.

Despite discussion of the dots, analysts focused even more closely on Jay Powell’s comments at his 2:30 pm ET press conference that followed the FOMC meeting.

The Fed’s Enemy of Choice

Most of Powell’s press conference focused on the policy dilemma we highlighted in our pre-meeting report last Monday. The Fed’s “dual mandate” requires the Fed to maintain price stability and create jobs at the same time. This is practically impossible to do on a consistent basis. There is no strong correlation between interest rates and employment.

Therefore, the Fed is forced to choose which part of the mandate it wants to address while it either ignores the other half of the mandate or concludes that it’s not a problem and can safely be left alone. The Fed’s action on Wednesday clearly shows it is less concerned about inflation for now and more willing to look at further rate cuts in future.

After a long period of stubbornly high inflation, inflation seemed to be coming under control and heading toward the Fed’s 2.0% target. Inflation, which peaked at 9.1% in June 2022, had been coming down steadily. The trend from March 2024 to September 2024 showed a drop from 3.5% to 2.4%. That trend was heading toward the Fed’s goal of 2.0% inflation.

The trend reversed suddenly in October 2024 when inflation rose to 2.6%. It then rose further in November 2024 hitting 2.7% then rose again to 3.0% in January 2025, the highest rate since last July. The reading for February 2025 was 2.8%, (the latest data available). That reduction from January to February is a move in the right direction, but not enough to get the Fed to cut at this meeting. The Fed will need to see further progress against inflation before shifting its focus from inflation to unemployment and growth.

Here’s the tale of the inflation tape using the Consumer Price Index on a year-over-year basis:

Date	CPI (year-over-year)
September 2024	2.4%
October 2024	2.6%
November 2024	2.7%
December 2024	2.9%
January 2025	3.0%
February 2025	2.8%
(The CPI data for March 2025 will be released on April 10, 2025).

Meanwhile, the unemployment rate has also been moving against the Fed’s goals. The U.S. unemployment rate hit an interim low of 3.4% in January 2023. From there, it rose to 3.9% in February 2024 then 4.2% in July 2024. Today, the unemployment rate is 4.1%, down slightly from last July but up significantly from January 2023. Still, the Fed is not overly concerned. At his press conference, Powell said, “we see unemployment pretty close to its natural level.” Powell also said, “overall it’s a labor market that’s in balance.” While recognizing that unemployment could be an individual hardship, he concluded that, “at the national level [layoffs] are not concerning yet.”

That said, the labor situation and prospects for growth are worse than the headlines indicate. The household survey, a Labor Department survey different than the employer survey used to calculate the official unemployment rate, showed significant job losses in February. The number of employed individuals per the household survey dropped by 588,000. The Labor Force Participation Rate (total employed divided by total workforce) also dropped from 62.6% to 62.4%. This is not a crisis, but it is troubling that the Fed seems not to be paying attention.

Major U.S. companies are also issuing warnings that earnings in the first quarter will not meet expectations. Walmart, Best Buy, Target, Kohl’s, American Airlines and Delta Airlines are among those who have revised earnings and revenue forecasts downward.

While these and other developments point in the direction of higher unemployment and slower growth (if not recession) they were still not dire enough to cause the Fed to change its emphasis from fighting inflation to fighting unemployment at this meeting. Still, if these trends continue as we expect, unemployment may return to the fore at the May 7 Fed meeting.

Powell discussed the inflationary aspects of Trump’s tariffs at greater length than expected. He said, “A good part of [expected inflation] is coming from tariffs” and “inflation may be moving up due to tariffs.” Powell added that, “There are going to be tariffs and in the short-term they tend to bring inflation up.”

“Uncertainty”- An Explanation for Everything

Still, Powell was not overly concerned about inflation. With regard to tariffs, he said, “tariff inflation” can be “transitory.” That seems like a bold assertion considering how wrong Powell was about the transitory nature of inflation in 2021-2022. He shrugged off any inflationary threat by adding, “If there’s an inflationary impulse, that’s going to go away on its own, that’s not the time to change policy.”

Another theme in Powell’s remarks was his recitation of uncertainty as a factor in Fed decision making (or non-decision making at Wednesday’s meeting). Powell said with regard to his analysis of interest rates and inflation that “the other factor is really high uncertainty.” He used the term uncertainty about twenty times over the course of the press conference. He added, “when we talk about separating the signal from noise, we mean that things are highly uncertain.” Of course, that’s just a reflection of the flavor-of-the-month phrase from Wall Street analysts and financial media anchors. They talk about uncertainty as an explanation for everything.

Finally, in response to a question about a possible $5,000 per person DOGE dividend check for the American people financed by cuts in government spending identified by the Department of Government Efficiency (DOGE), Powell punted. He said, “I’m gonna’ pass on that one.”

Prospects for a rate cut at the next Fed meeting have been increased due to indications of slower growth and rising unemployment as well as recent stock market declines. Between mid-December 2024 and mid-March 2025, the NASDAQ Composite, the Dow Jones Industrial Average and the S&P 500 Index all suffered a technical correction defined as a decline of over 10% from the previous high.

A Powell Put – Not Just Yet

Will the Federal Reserve ride to the rescue of stock investors? Not directly. The Fed actually doesn’t care about the stock market unless it becomes “disorderly.” We’re not there yet. Down is not the same as disorderly. If markets crash as they did in March 2020, the Fed probably would activate the Powell Put and quickly cut rates. But the Fed won’t do anything specific to help stocks based on what we’ve seen so far. That’s not their job.

Still, the Fed could factor the recent stock market declines into their analysis about a potential rate cut at the May meeting alongside unemployment and slower growth (and assuming further progress on inflation). The Fed may return to rate cuts by their May meeting as a result. Fed Chair Jay Powell will focus on the dual mandate of low unemployment and price stability as required by law. But the Fed can juggle which part of the mandate (jobs or inflation) takes precedence at any point in time.

The next Fed meeting is May 7. Powell was noncommittal on what the Fed will do then. He said, “we do not need to be in a hurry to adjust our policy stance.” He then added, “We’re at a place where we can cut, or we can hold.”

The Fed’s policy move at the May meeting will be a close call. The Fed may cut interest rates again by 0.25% given the deteriorating employment situation. On the other hand, the Fed could stand pat in view of the inflation metrics, which declined slightly for February but remain too high for the Fed. We’ll know the likely outcome before the meeting and advise our readers accordingly.

The May decision is truly data dependent and will be made on the basis of new inflation readings including CPI on April 10. New employment reports will be released on April 4 and May 2, both before the May 7 meeting.

This kind of data dependence is revealing because it shows the Fed is following markets and not leading them. That’s bad news for investors because if the Fed were leading the economy, they would get ahead of the coming recession. They’re not doing either.

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