20.03.25 - A step towards stagflation

The Federal Open Market Committee (FOMC) left the fed funds rate unchanged, as expected. The Fed indicated they see half a percentage point of rate cuts for 2025, which typically means two reductions.
At the same time, the central bank lowered its projection for US economic growth in 2025 to 1.7% from 2.1% in December, while raising its inflation outlook to 2.8% from 2.5%.
Furthermore, the committee announced to slow the pace of the quantitative tightening, reducing the pace of shrinking its balance sheet by selling bonds.

Markets: US markets jumped with Nasdaq closing the day up 1.3% while S&P 500 Index gained 1.08%. The 10-year Treasury fell down to 4.23% from 4.3% while short rates were going north. USD declined while gold price saw an uptick.

My view: I was surprised investors reacted so positively to the Fed's statement, given that the economic outlook appears less favorable and uncertainties about the impact of tariffs persist. Investors seem unconcerned about the increasing probability of an economic downturn and the potential escalation of the trade war. As a reminder, the next significant tariff announcement is scheduled for April 2nd.

My view on interest rates remains consistent: there is room for rates to decrease, particularly on the longer end. This outlook applies to Europe as well, with the recent spike in interest rates during March following Germany's announcement of a EUR 500 billion debt package.

Therefore, I continue to maintain my long-term Treasury position, established when the 10-year yield reached 4.8% back in January.

Regarding equities, I retain a cautious stance, even after the recent market correction.

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