Fed Holds Rates, Slows Balance Sheet Runoff: Policy Pivot Signals Caution Amid Economic Crosswinds

Updated March 26, 2025

Source: AP Photo/Andrew Harnik

FOMC Keeps Interest Rates Steady at 4.25%–4.50%

In its highly anticipated March meeting, the Federal Open Market Committee (FOMC) opted to leave the federal funds rate unchanged at 4.25% to 4.50%, reflecting continued caution as the central bank navigates a mixed economic outlook.

This decision marks the fifth consecutive meeting without a rate change, reinforcing the Fed’s message that inflation remains sticky, while signs of slowing growth warrant restraint in monetary tightening.

Balance Sheet Reduction to Slow in April

In a notable shift, the Fed announced it will slow the pace of its balance sheet runoff, starting in April.

• Monthly Treasury redemptions will be capped at $5 billion, down from $25 billion

• The central bank cited a desire to maintain financial stability and avoid unnecessary tightening of financial conditions

This move suggests a more dovish tilt, aimed at preserving market liquidity and managing long-term rate expectations as growth moderates.

Economic Projections: Growth Cut, Inflation Raised

Alongside its rate and balance sheet guidance, the Fed also updated its Summary of Economic Projections:

The adjustments reflect growing concerns that tightening credit conditions and global uncertainty could weigh on economic momentum, while service sector inflation and wage pressures remain elevated.

Market Implications and Investor Takeaways

The Fed’s stance sends a nuanced signal to markets: while it remains committed to its inflation mandate, it is clearly aware of downside risks to growth.

Key takeaways for investors:

• A slower balance sheet runoff could be supportive for risk assets and bonds, easing upward pressure on yields

• No near-term rate cuts are expected, but this shift may build the case for action in the second half of 2025

• The Fed is walking a tightrope—balancing inflation control with financial stability