March 2025 Federal Reserve FOMC: Fed Slows QT, Holds Rates, and Trump Stirs the Pot

TradingKey - The Federal Reserve (Fed) wrapped up its March 2025 policy meeting on Wednesday (19 March) and did so with a mixed bag of signals. 

While interest rates remain unchanged, the Fed is tapping the brakes on quantitative tightening (QT) – a move that could have big implications for financial markets.

At the same time, the inflation outlook remains uncertain, and former President Donald Trump wasted no time jumping into the conversation, demanding rate cuts ahead of his planned tariff rollout. 

With Wall Street reacting swiftly to the Fed’s decisions, investors are now left wondering: Is this the first step toward easing, or just a tactical pause?

Fed slows QT amid debt ceiling uncertainty

Since mid-2022, the Fed has been steadily reducing its balance sheet by allowing Treasuries and mortgage-backed securities (MBS) to roll off. This process, known as QT, was initially running at a combined pace of US$95 billion per month. Now, the Fed is slowing things down.

Starting 1 April, the Treasury runoff will be reduced to just US$5 billion per month, down from US$25 billion. The cap on mortgage-backed securities (MBS) remains unchanged at US$35 billion per month.

The decision comes amid the ongoing debt ceiling standoff in Washington. With lawmakers still working to strike a deal, Powell noted that liquidity conditions are tightening, even though banking reserves remain ample. 

By slowing QT, the Fed gives itself more flexibility in managing financial conditions, ensuring that market liquidity doesn’t dry up at a critical moment.

Rates hold steady, but inflation is still a concern

The Fed’s decision to hold interest rates steady for the second consecutive meeting was widely expected, but that doesn’t mean all is well. Inflation remains stubborn, and economic growth forecasts for 2025 have been revised lower.

Chair Jerome Powell downplayed recession risks, saying they are “not high” at the moment, but he acknowledged that the inflationary impact of tariffs remains uncertain. In a notable moment, Powell revived the term “transitory” when describing how tariffs might impact prices.

That word brings back memories of 2021, when the Fed misjudged inflation as temporary – only to be forced into aggressive rate hikes just a year later in 2022.

Despite inflation concerns, the Fed didn’t change its projection for two rate cuts in 2025, suggesting that policymakers still see room to ease later in the year. Markets took this as a dovish signal, driving a stock market rally in afternoon trading.

Trump calls for rate cuts as tariff battle heats up

Just hours after the Fed’s announcement, President Donald Trump turned up the pressure on Powell, calling for immediate rate cuts. Trump wrote on Truth Social that:

“The Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy. Do the right thing. April 2nd is Liberation Day in America!!!”

The timing of Trump’s comments wasn’t random. His administration is preparing to announce a fresh wave of tariffs on 2 April, a move that could further complicate the inflation outlook. 

Powell acknowledged that tariffs could push prices higher, but he suggested the effect might be temporary; a stance that remains highly debated.

For investors, Trump’s tariffs create another layer of uncertainty. If tariffs drive inflation higher, the Fed could be forced to delay rate cuts. But if tariffs slow economic growth more than expected, the Fed may have to cut rates sooner than planned.

What’s next for investors?

This week’s Fed meeting confirmed a few key themes. Interest rate cuts aren’t happening just yet, but they are still on the table for later in 2025. 

QT is slowing down, giving the Fed more flexibility to respond to market conditions. And Trump’s tariff policy is an emerging wildcard that could complicate the Fed’s decision-making.

For investors, the focus now shifts to inflation data, economic growth trends, and political developments in Washington. If inflation continues to ease, the Fed could move forward with rate cuts later this year. But if tariffs trigger another price spike, the Fed may have to stay on hold longer than markets expect.

With Powell and Trump now pulling in opposite directions, investors should be prepared for more volatility in the months ahead.