Federal Reserve policy has been a key driver of markets over the past few years. It’s not surprising to investors that changes in policy direction have resulted in market swings, most notably in 2022 when the Fed began to hike rates, and again last year when investors anticipated Fed rate cuts.
So far in 2025, the Fed has kept policy rates unchanged despite investor concerns over tariffs, consumer sentiment, and a possible economic slowdown. Why is the Fed on hold and how does it affect you?
The Fed has kept rates unchanged this year
The Fed’s main objective is to achieve its dual mandate set by Congress: maximum employment and stable prices. This translates into keeping both unemployment and inflation low. This is why the Fed increased interest rates in 2022 to combat rising prices, and then began cutting rates last year as inflation pressures eased. At the start of 2024, investors worried that beating inflation would require slowing the economy, a possibility that fortunately did not take place.
However, the Fed now faces greater uncertainty. In its Summary of Economic Projections published after its recent March meeting, it downgraded the outlook for economic growth. These projections suggest that GDP may only grow 1.7% in 2025, a slowdown from 2.5% in 2024 according to the Bureau of Economic Analysis. The last time GDP growth fell below 2% was in 2022 when inflation was running hot.
Expectations of higher inflation and unemployment both contributed to the lowered 2025 guidance. Despite the worsening outlook, the Fed did not change its rate guidance for the next few years. This suggests the Fed is taking a balanced approach to economic risks, despite how the market has reacted over the past month.
According to the Fed’s statement and press conference, there are a few reasons for this. Prominently, the primary concern around tariffs is that they could spark higher prices for consumers. While this is never pleasant, it’s important to distinguish between one-time price increases on specific goods and persistent inflation. In 2018, for instance, washing machine prices shot higher due to tariffs, but then stabilized. This is different from pressures that raise many or all prices of goods and services across the entire economy, such as when an economy is overheating or when supply chains are disrupted.
This is why the Fed is trying to look past the near-term effects of trade policy, and not overreact to what it often refers to as “transitory” events. Of course, if tariffs are applied more broadly and are longer lasting, inflation could move higher, hurting consumer pocketbooks.
The three most-followed inflation gauges currently remain above the Fed’s official long-run inflation target of 2.0%. This difference is one reason financial markets have been far more reactionary than the Fed in recent weeks.
Another important reason for a balanced approach by the Fed is the underlying strength in various parts of the economy. Fed Chair Jerome Powell highlighted low unemployment, rising wages, and significant job openings as important indicators of economic health. He also emphasized that how consumers feel and how much they spend don’t always align. This is true today with consumer confidence near its lows even as retail sales remain relatively steady.
Chair Powell also highlighted that the data can be hard to interpret. For instance, consumers and businesses might buy more ahead of expected tariffs, not less, if they expect prices to rise in the future. This can be counterintuitive and cloud the numbers. He also emphasized that while higher grocery bills are a real challenge for everyday Americans, they are backward-looking as an inflation indicator.
The Fed still expects to cut rates twice this year
What can we expect from the Fed going forward? While the Fed kept rates unchanged at its March meeting, it still expects to cut twice in 2025. Similarly, market-based forecasts expect the Fed to cut rates two or three more times in 2025, reflecting confidence that inflation will make some progress this year, despite the tariff uncertainty.
It’s important to put these expectations in perspective, since they can change quickly. For example, entering 2024, investors anticipated seven to eight Fed rate cuts in the wake of slowing inflation before adjusting to zero rate cuts. In the end, three cuts were implemented. Even the Fed’s own rate forecasts from its Summary of Economic Projections can change meaningfully each quarter.
Additionally, although the Fed did not cut rates in March, it did announce that it will slow the roll-off of assets on its balance sheet. In simple terms, the Fed will provide more support to the economy, which may effectively lower interest rates. This means that the Fed will buy more Treasury securities than it has been when its bond holdings mature. Many economists have been speculating on when the Fed would end its “quantitative tightening” program, the name by which this policy is known.
Given that the actual path of rates is hard to predict, it’s important to not focus on any individual Fed decision. Instead, the overall path of rates is what matters for long-term investors and their portfolios.
Historically, falling policy rates have helped to support markets and the economy by making it easier for businesses and consumers to borrow, boosting economic activity. The exact number of rate cuts may change the timing, but not the overall trajectory of Fed policy.
Cash may feel safe, but it can be counterproductive
As long as interest rates remain elevated, some investors may seek the perceived safety of cash. This is a natural reaction to market swings and worrying headlines. However, holding an inappropriate level of cash can be counterproductive. History shows that markets often recover when investors least expect it, and not benefiting from portfolio growth can derail financial plans.
Despite their appeal over the past few years, many traditional cash vehicles also offer inadequate yields once inflation is taken into consideration. This is because higher prices can quietly erode the purchasing power of cash, even if it may not feel that way based on account balances alone. As the accompanying chart shows, interest income on cash is often still negative after adjusting for inflation, based on nationwide averages.
While some vehicles may provide greater yields, cash is not a long-term solution to income generation or portfolio growth. So, while there continues to be market uncertainty amid recession fears, tariff risks, and the Fed on hold, it’s important to maintain a long-term perspective. Market volatility is a normal part of investing, but there will likely also be greater clarity in the coming months as the situation unfolds.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Fed’s Rate Pause | What it Means for You
Federal Reserve policy has been a key driver of markets over the past few years. It’s not surprising to investors that changes in policy direction have resulted in market swings, most notably in 2022 when the Fed began to hike rates, and again last year when investors anticipated Fed rate cuts.
So far in 2025, the Fed has kept policy rates unchanged despite investor concerns over tariffs, consumer sentiment, and a possible economic slowdown. Why is the Fed on hold and how does it affect you?
The Fed has kept rates unchanged this year
The Fed’s main objective is to achieve its dual mandate set by Congress: maximum employment and stable prices. This translates into keeping both unemployment and inflation low. This is why the Fed increased interest rates in 2022 to combat rising prices, and then began cutting rates last year as inflation pressures eased. At the start of 2024, investors worried that beating inflation would require slowing the economy, a possibility that fortunately did not take place.
However, the Fed now faces greater uncertainty. In its Summary of Economic Projections published after its recent March meeting, it downgraded the outlook for economic growth. These projections suggest that GDP may only grow 1.7% in 2025, a slowdown from 2.5% in 2024 according to the Bureau of Economic Analysis. The last time GDP growth fell below 2% was in 2022 when inflation was running hot.
Expectations of higher inflation and unemployment both contributed to the lowered 2025 guidance. Despite the worsening outlook, the Fed did not change its rate guidance for the next few years. This suggests the Fed is taking a balanced approach to economic risks, despite how the market has reacted over the past month.
According to the Fed’s statement and press conference, there are a few reasons for this. Prominently, the primary concern around tariffs is that they could spark higher prices for consumers. While this is never pleasant, it’s important to distinguish between one-time price increases on specific goods and persistent inflation. In 2018, for instance, washing machine prices shot higher due to tariffs, but then stabilized. This is different from pressures that raise many or all prices of goods and services across the entire economy, such as when an economy is overheating or when supply chains are disrupted.
This is why the Fed is trying to look past the near-term effects of trade policy, and not overreact to what it often refers to as “transitory” events. Of course, if tariffs are applied more broadly and are longer lasting, inflation could move higher, hurting consumer pocketbooks.
The three most-followed inflation gauges currently remain above the Fed’s official long-run inflation target of 2.0%. This difference is one reason financial markets have been far more reactionary than the Fed in recent weeks.
Another important reason for a balanced approach by the Fed is the underlying strength in various parts of the economy. Fed Chair Jerome Powell highlighted low unemployment, rising wages, and significant job openings as important indicators of economic health. He also emphasized that how consumers feel and how much they spend don’t always align. This is true today with consumer confidence near its lows even as retail sales remain relatively steady.
Chair Powell also highlighted that the data can be hard to interpret. For instance, consumers and businesses might buy more ahead of expected tariffs, not less, if they expect prices to rise in the future. This can be counterintuitive and cloud the numbers. He also emphasized that while higher grocery bills are a real challenge for everyday Americans, they are backward-looking as an inflation indicator.
The Fed still expects to cut rates twice this year
What can we expect from the Fed going forward? While the Fed kept rates unchanged at its March meeting, it still expects to cut twice in 2025. Similarly, market-based forecasts expect the Fed to cut rates two or three more times in 2025, reflecting confidence that inflation will make some progress this year, despite the tariff uncertainty.
It’s important to put these expectations in perspective, since they can change quickly. For example, entering 2024, investors anticipated seven to eight Fed rate cuts in the wake of slowing inflation before adjusting to zero rate cuts. In the end, three cuts were implemented. Even the Fed’s own rate forecasts from its Summary of Economic Projections can change meaningfully each quarter.
Additionally, although the Fed did not cut rates in March, it did announce that it will slow the roll-off of assets on its balance sheet. In simple terms, the Fed will provide more support to the economy, which may effectively lower interest rates. This means that the Fed will buy more Treasury securities than it has been when its bond holdings mature. Many economists have been speculating on when the Fed would end its “quantitative tightening” program, the name by which this policy is known.
Given that the actual path of rates is hard to predict, it’s important to not focus on any individual Fed decision. Instead, the overall path of rates is what matters for long-term investors and their portfolios.
Historically, falling policy rates have helped to support markets and the economy by making it easier for businesses and consumers to borrow, boosting economic activity. The exact number of rate cuts may change the timing, but not the overall trajectory of Fed policy.
Cash may feel safe, but it can be counterproductive
As long as interest rates remain elevated, some investors may seek the perceived safety of cash. This is a natural reaction to market swings and worrying headlines. However, holding an inappropriate level of cash can be counterproductive. History shows that markets often recover when investors least expect it, and not benefiting from portfolio growth can derail financial plans.
Despite their appeal over the past few years, many traditional cash vehicles also offer inadequate yields once inflation is taken into consideration. This is because higher prices can quietly erode the purchasing power of cash, even if it may not feel that way based on account balances alone. As the accompanying chart shows, interest income on cash is often still negative after adjusting for inflation, based on nationwide averages.
While some vehicles may provide greater yields, cash is not a long-term solution to income generation or portfolio growth. So, while there continues to be market uncertainty amid recession fears, tariff risks, and the Fed on hold, it’s important to maintain a long-term perspective. Market volatility is a normal part of investing, but there will likely also be greater clarity in the coming months as the situation unfolds.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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