Goldman Sachs Views: March FOMC – Key Takeaways

Market Outlook: Markets seek clarity on trade uncertainty, growth forecasts, and QT policy. Goldman expects the FOMC to maintain a cautious stance, signalling no urgency to cut rates. Growth projections are down, unemployment is up, and core inflation is rising toward 3%, complicating the Fed's dual mandate.

Rates & Strategy: GIR prefers long front-end US rates, shorting USD in hawkish Fed reactions, and anticipates credit underperforming its historical beta to stocks as markets adjust to a new regime.

Economic Projections: The FOMC is expected to hold rates steady amid policy uncertainty. Tariffs have raised inflation and lowered growth forecasts, with 2025 core PCE inflation projected at 2.8% (+0.3%) and GDP growth at 1.8% (-0.3%). Despite challenges, the Fed may keep 2025’s projection of two rate cuts to avoid market instability. GIR expects rates at 3.875% (2025), 3.375% (2026), and 3.125% (2027), with the neutral rate slightly higher at 3.125%.

Tariff Impact: Higher tariffs complicate policy, raising inflation and dampening growth. While normalisation cuts for 2024 seem unlikely, the Fed may consider “insurance cuts” later if risks escalate.

Balance Sheet Strategy: The Fed may slow its balance sheet runoff, potentially halting Treasury reductions while continuing mortgage-backed securities reductions through Q3. A decision could come as soon as May or even during the March meeting. This reflects the Fed’s effort to manage liquidity amid economic shifts.

Summary: The Fed faces complex trade-offs as it navigates elevated inflation and slower growth, with its outlook closely aligned to current market pricing.

GS Trading/Strategy

Rates:

- Bullish US Front-End; Bearish Equities; Bullish Swap Spreads: Fed is in a "watchful waiting" mode, anticipating weaker data in March/April, leading to rate cuts by June. Labor market weakness will drive policy easing. Tariffs impact mandates oppositely. Starting from restrictive policy allows room for rate cuts. Bullish on US front-end rates (~60bps cuts), bearish on equities near-term, bullish on swap spreads.

- Neutral on Rate Vol; Slight Bias to Short Payer Side: Softer payrolls/inflation data calmed rate vol. Neutral stance with slight bias to short payer side via payer ladders/ratios. Rate vol may drop further if equity markets relax.

- Receive May FOMC: May FOMC receiving favored amidst recession fears. Expect no major statement changes, with dots likely showing 2 cuts for 2025. Fed balancing inflation uptick and softer growth data.

FX:

- Short USD in Hawkish Fed Reaction: Fed perceived hawkishness (due to rising dots, inflation expectations, or Powell's tone) could strengthen USD briefly. Short USD as Europe’s narrative shift progresses and Fed may soften stance later.

- Fed Constrained on Inflation Mandate: Core PCE tracking higher and inflation expectations complicate Fed’s ability to cushion growth. Balancing growth risks and inflation pressures makes cuts tougher than in 2019.

Equities:

- Market Isn’t Pricing Major Fireworks: Equity vol spiked in February but normalized post-CPI. SPX implied move for FOMC is 1.3%. If no major news, vol relaxation may continue.

- Favor Diversification Across Equities & Bonds: Fed likely to hold rates steady amidst policy uncertainty and tariff impacts. Growth risks remain downside. Diversification across equities/bonds recommended as yields may fall with downgraded growth outlook.