Signs of recession are emerging. What are the core concerns of the FOMC meeting in March?

Signs of recession have appeared a little, and the financial market is full of panic, Fed officials must have seen it, so the core contradiction of the March FOMC meeting is that policy makers need to weigh the trade-offs between "slower growth" and "inflation stickiness" and whether to hedge against "Trump uncertainty" in advance.

If the meeting sends signals including "lower inflation tolerance + late interest rate cuts" and ignoring the chaos caused by Trump's fiscal and tariffs, this will drive US bonds, US stocks and currency circles to decline, and the US dollar will strengthen in the short term; (Of course, I think the probability of gathering these hawkish elements is very low)

On the contrary, if the Fed believes that current inflation is driven by temporary factors (such as tariffs, supply chains), or believes that the risk of recession is greater than the inflation risk, so it tolerate inflation temporarily higher than the 2% target, or triggers the expected rate cut to be advanced, it will be beneficial to risky assets.

In addition, if the Fed is too worried about economic growth, even if there is an expectation of a water supply, it may bring short-term panic and temporary or disorderly fluctuations to the market.

The following are detailed explanations of specific points that need attention:

1. Interest rate decisions and policy positions

Whether to keep interest rates unchanged:

All institutions unanimously expect the Federal Reserve to maintain the target range of federal funds rate between 4.25% and 4.50%, continuing the position of "no rush to act", and there should be no surprise here. If something happens, close your eyes and go long.

Policy Statement Wording:

Focus on whether the statement adjusts its assessment of economic growth, inflation and risk balance (such as shifting from "strong growth" to "moderate slowdown") and whether the wording of "waiting patiently". Pay attention to whether officials downplay the rising unemployment rate and continue to emphasize the tight labor market.

If the statement emphasizes the tenacity of inflation, it may suppress risky assets; if the risk of inflation growth is downplayed, it may boost the stock market and currency market.

2. Economic Forecast Adjustment (SEP)

Growth and unemployment rate:

Wall Street expects Fed officials to slightly lower GDP growth in 2025 (from 2.1% to 2.0%), reflecting a drag on trade policy and slowing consumption, and the unemployment rate may remain low (4.3%).

Inflation path:

Core PCE inflation last forecast was 2.5%, which is a bad signal if officials consider tariff transmission and salary stickiness.

In addition, whether long-term inflation expectations are "deaned" (such as the latest warning that the University of Michigan inflation expectations jumped to 3.9%).

Market impact: If the GDP growth rate is lowered and the core PCE inflation forecast is up, it means that the stagflation expectations are heating up, which may suppress risky assets and be beneficial to gold.

3. Rate cut signal of Dot Plot

Median rate cuts in 2025: The current market expects to be twice (25bp each), and it is necessary to observe whether it is maintained, reduced (once) or increased (three times).

Long-term neutral interest rate (r*): If trade policy is believed to push up supply-side costs, it may lead to an upward revision of r*, suggesting less room for interest rate cuts.

Member differences: Pay attention to the degree of dispersion of the distribution of point matrix maps. If the forecast in 2025 focuses on 1-3 interest rate cuts, the policy path will be more uncertain.

Market impact:

The stagflation signal has appeared, so the core of this dot matrix chart is to verify the Federal Reserve's tolerance for the risk of "stagflation".

If the dot chart implies fewer interest rate cuts (1 time), short-term yields will jump, which will be negative for risky assets; if there are more interest rate cuts (3 times), it will boost risk appetite.

If the dot matrix graph shows more interest rate cuts, it is necessary to verify whether the core PCE prediction is downgraded simultaneously (the original prediction is 2.8%). Contradictory signals (more interest rate cuts + higher inflation) will cause market chaos.

4. Quantitative austerity (QT) adjustment plan

Rhythm of reduction:

QT adjustments may include slowing down the pace of the table of balance sheets or pausing MBS share reductions (currently shrinking $35 billion per month).

Reinvestment strategy:

Focusing on whether MBS repayment funds are proportionately reinvested in Treasury bonds (neutral strategy) or tending toward short-term notes (Bills), which may aggravate short-term distortions, especially the debt ceiling has led to a decrease in bills issuance. If reinvestment tends toward neutral or long-term bonds, it may lower the long-term yield and alleviate the pressure of maturity premium, which will be an additional benefit.

Market impact:

This may be the biggest potential benefit of this meeting. If the QT end timetable is clarified or the expectations of market liquidity pressure relief may be favorable to the rebound of risky assets.

5. Trade policy and inflation risks

Tariff Impact Assessment:

Whether the Fed mentioned in a statement or press conference the two-way impact of trade policy uncertainty on growth and inflation (some institutions expect tariffs to push up core PCE by 0.5pp).

Whether concerns about the risk of "stagflation" (markets have been priced to recession, but the Fed is more concerned about inflation).

If inflation expectations are out of control, whether to send out a hawkish signal of "raising interest rates if necessary" (low probability, but beware).

Market impact:

If Fed emphasizes inflation stickiness, the rise in real interest rates will suppress gold; if stagflation is recognized, risky assets will be sold. If inflation is controllable, wait and see.

6. Debt cap and fiscal policy risks

Risk of government shutdown:

The debt ceiling deadlock is still unresolved. It will be good news to pay attention to whether the Fed is hinting at liquidity support measures in advance (such as adjusting SRF tools).

Financial drag:

Whether the impact of government spending cuts on economic growth is included in the SEP forecast (such as federal layoffs dragging jobs).

Market impact:

The market impact here may be tricky. Generally speaking, if the Fed is worried about the chaos in the Treasury bond market and pessimistic expectations of economic growth, the market may panic and sell at the first time, and then the attention may return to the Fed's expectations of water release. Therefore, if the market occurs, the market may not find its direction in the short term, and it will fluctuate greatly.