Weekly Update 03/21/2025: Fed Holds Rates Steady; Powell Sounds Confident on Economic Outlook
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Domestic Economic News
US retail sales rose by less than forecast in February and the prior month was revised lower, adding to concerns of a pullback in consumer spending. The value of retail purchases, not adjusted for inflation, increased 0.2% after a revised 1.2% decline in January, Commerce Department data showed Monday. Excluding autos, sales advanced 0.3%. The retail report largely encompasses spending on goods, which is especially relevant now as President Donald Trump imposes tariffs on a swath of imports from major trading partners — likely driving up prices. That’ll not only hit low- income consumers who are already strapped for cash, but also wealthier Americans as a recent stock-market selloff discourages big investments. Seven of the report’s 13 categories posted decreases, notably motor vehicles — which were expected to rebound from a weak January. Gasoline sales, as well as those of electronics and apparel were also lower. Spending at restaurants and bars, the only service-sector category in the retail report, declined by the most in a year. Stock futures pared losses and Treasury yields rose after the report Monday morning.
US factory output rose by the most in a year as a surge in motor vehicle production led a broader increase that helps ease concern of weakening in manufacturing. Manufacturing output, which accounts for three-fourths of total industrial production, jumped 0.9% on a sharp pickup at auto plants, Federal Reserve data showed Tuesday. Overall industrial production, which also includes mines and utilities, climbed 0.7% after a downwardly revised 0.3% gain a month earlier. Output at utilities fell in February, while mining increased 2.8%. Excluding autos, factory production increased 0.3%, marking the third straight monthly advance. Manufacturing has shown some signs of stabilizing even as producers are challenged by rising input costs and heightened uncertainty from President Donald Trump’s escalating tariffs.
US housing starts rose in February by more than forecast after a weather-related plunge, led by a pickup in single-family home construction that indicates builder incentives are underpinning demand. New residential construction increased 11.2% to an annualized rate of 1.5 million in February, according to government data released Tuesday. The median estimate of economists surveyed by Bloomberg called for an annualized 1.39 million starts. New construction of single-family homes rose 11.4% to an annualized 1.11 million rate. The report also showed building permits, an indicator of future construction, decreased 1.2% to an annualized pace of 1.46 million. Single-family home authorizations decreased 0.2%.
Sales of previously owned homes in the US unexpectedly bounced back in February, spurred by a greater supply of houses and improved weather heading into the crucial spring period. Contract closings increased 4.2% to an annualized rate of 4.26 million in February, according to National Association of Realtors figures released Thursday. The figure exceeded all estimates in a Bloomberg survey of economists. Sales climbed the most in the West and South, which were afflicted at the start of the year by destructive wildfires in Los Angeles and severe winter storms, respectively. To the extent January sales were affected by weather, NAR Chief Economist Lawrence Yun said last month that those transactions would be carried into February. The supply of previously owned homes jumped 17% from a year ago to 1.24 million, the most for any February since 2020. Even so, the median sales price increased 3.8% from a year ago to $398,400 — a record for the month — extending a run of year-over-year price gains dating back to mid-2023. “Home buyers are slowly entering the market,” Yun said in a statement. “Mortgage rates have not changed much, but more inventory and choices are releasing pent-up housing demand.” The housing market entered 2025 with some momentum as home buyers and sellers have come to terms with elevated mortgage rates, freeing up inventory that has made a slight dent in prices. However, home prices are still high and housing remains unaffordable for many Americans. The contract rate on a 30-year fixed mortgage steadily declined from mid-January to early March, which spurred greater demand for home purchases, according to the Mortgage Bankers Association. However, the recent rate drop likely didn’t influence February sales, since existing homes typically go under contract a month or two before closing. High mortgage rates discouraged many homeowners from listing their houses for sale the last couple years, because they didn’t want to give up their low rates to look for a new home with a higher one. But that so-called “lock-in effect” has been dissipating recently as people grow more accustomed to high financing costs.
Applications for US unemployment benefits were little changed last week at a relatively low level that underscores a resilient labor market. Initial claims increased by 2,000 to 223,000 in the week ended March 15, according to Labor Department data released Thursday. That was in line with the median forecast in a Bloomberg survey of economists. Continuing claims, a proxy for the number of people receiving benefits, rose to 1.89 million in the week ended March 8, also matching expectations.
Interest Rate Insight and the Fed
Federal Reserve officials held their benchmark interest rate steady for a second straight meeting, caught between mounting concerns that the economy is slowing and inflation could remain stubbornly high. Chair Jerome Powell acknowledged the high degree of uncertainty from President Donald Trump’s significant policy changes, but repeated the central bank is not in a hurry to adjust borrowing costs. He said officials can wait for greater clarity on the impact of those policies on the economy before acting. The Federal Open Market Committee voted on Wednesday to keep the benchmark federal funds rate in a range of 4.25%-4.5%, and said it would further slow the pace at which it is reducing its balance sheet. Governor Christopher Waller, who supported holding rates steady, dissented from the decision over the balance sheet move. The decision to hold rates steady comes as Trump’s ambitious and frequently erratic policy agenda has placed the economy, and the Fed’s ability to keep it on track, under increasing pressure. Trump’s ever-changing plans to levy tariffs on US trading partners have stoked fears of an economic slowdown and raised fresh worries over inflation — a combination that could pull policymakers in opposite directions. “Inflation has started to move up,” Powell said, “we think partly in response to tariffs. And there may be a delay in further progress over the course of this year.” Powell said his base case is that any tariff-driven bump in inflation will be “transitory,” but later added it will be very challenging to say with confidence how much inflation stems from tariffs versus other factors.
New economic projections showed Fed officials marked down their forecasts for growth this year, while boosting estimates of inflation. It also showed officials continued to pencil in a half percentage point of rate cuts this year, according to the median estimate, implying two quarter-point rate reductions. That said, eight officials saw one reduction or fewer this year, underscoring policymakers’ resolve to suppress inflation even if growth slows. “Uncertainty around the economic outlook has increased,” the committee said in a post-meeting statement. Officials also removed prior language stating that risks to achieving their employment and inflation goals were roughly in balance. Officials raised the median estimate for so-called core inflation, which strips out volatile food and energy prices, at the end of this year to 2.8% from 2.5%. Their outlook for 2025 economic growth cooled to 1.7% from 2.1%. They raised their estimate for unemployment to 4.4% by the end of this year, from the 4.3% they saw in December.
Fed officials have kept rates steady this year after cutting them by a percentage point in the closing months of 2024. Since December, they’ve signaled a desire to see more progress on inflation, and more clarity on the impact of Trump’s policies, before they consider another move. In that time, inflation has remained elevated while consumers’ expectations for future price growth have climbed amid an escalating trade war. Spending has softened, and consumer confidence has deteriorated sharply. Investors have also reacted negatively, with the S&P 500 falling more than 10% from mid-February before paring some of those losses. The Trump administration has done little to ease recession fears, with the president saying on March 9 the US economy faces a “period of transition.” Treasury Secretary Scott Bessent has said the US economy and financial markets were in need of a “detox.”
The Fed also said that, beginning in April, it will lower the monthly cap on the amount of Treasuries on its balance sheet that it allows to mature without being reinvested, to $5 billion from $25 billion. It will leave the cap on mortgage-backed securities unchanged at $35 billion. Waller preferred to continue the current pace. Various officials noted during the committee’s January meeting that it might be appropriate to consider pausing or slowing the Fed’s balance-sheet runoff until the federal government is no longer up against the debt ceiling, the statutory limit for outstanding Treasury debt. The US hit that limit in January. The Fed first started slowing the pace at which it shrinks its portfolio of assets in June — a bid to ease potential strain on money market rates.
Impactful International News
Investor confidence in Germany’s economy soared by the most in more than two years as the country prepares for hundreds of billions of euros of infrastructure and military investments under its new government. The ZEW institute’s expectations index rose to 51.6 in March from 26 the previous month – the highest reading since February 2022. That’s more than the 48.3 median estimate of analysts in a Bloomberg survey. A measure of current conditions also rose, but by less than anticipated. “The brighter mood is likely due to positive signals regarding the future German fiscal policy,” ZEW President Achim Wambach said in a statement. In addition, “the sixth consecutive interest-rate cut by the European Central Bank means favorable financing conditions for private households and companies.” The data come ahead of a crunch vote Tuesday in parliament for the debt-financed spending package that would mark a game-changing turn away from Germany’s traditional budget discipline. Analysts reckon the measures will help drag Europe’s largest economy out of its longstanding rut, though the effects will probably only kick in next year. In 2024, Germany’s gross domestic product shrank for a second consecutive year and prospects for 2025 remain bleak. On Monday, the OECD revised down its growth forecast to 0.4% from 0.7%. In 2026, it expects 1.1%. The country is still suffering from flimsy global demand, the cutoff of Russian energy supplies, over-regulation and a dearth of skilled workers. US President Donald Trump’s trade threats pose additional risks. He said at the weekend that he’d impose both broad reciprocal tariffs and additional sector-specific tariffs on April 2. Bundesbank President Joachim Nagel reiterated last week that Germany is particularly vulnerable to US protectionism and new levies. Output could even shrink again this year, he warned.
The European Central Bank is keeping its options open as geopolitical shifts weigh on the global economy, according to Governing Council member Olli Rehn. At an event organized by MNI, the Finnish central-bank chief said “exceptional uncertainty” is slowing the recovery of the euro zone’s 20-nation economy. Inflation, meanwhile, is “stabilizing” at the 2% target. “The Governing Council wants to retain full freedom of action, especially in our current times of pervasive uncertainty,” he said Tuesday. “We are not pre-committed to any particular rate path.” The outlook for ECB borrowing costs is less certain after six cuts since June that have brought the deposit rate to 2.5%. Policymakers are struggling to assess multiple risk factors — from US trade tariffs to the war in Ukraine and domestic fiscal policy. That’s left officials less sure about the prospects for inflation and economic expansion. Rehn’s Croatian counterpart, Boris Vujcic, said April’s policy meeting “is completely open.” “By the time of the meeting we’ll get the relevant data, and then we’ll decide in which direction we’ll go,” he told reporters Tuesday in Zagreb. Analysts see two more rate reductions — next month and in June. Markets have pared bets and now see only one or two cuts this year, including a possible pause on April 17. While hundreds of billions of euros in higher spending in defense and infrastructure in Europe could fuel growth and inflation, US tariffs threaten to hit activity, with the effects on inflation still unclear. Rehn expects a more sizable blow to output. “The negative impact on growth from a trade war is or would be larger than the impact on inflation,” he argued. He said Europe’s investments should boost the economic outlook over the medium term. In the meantime, the effect of the rate hikes enacted in recent years to tame inflation remains visible. “I would still qualify financing conditions as tight even though we have probably bottomed out and we are seeing some easing in in financial conditions,” Rehn said.
Company Events
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