Fed Holds, Growth Slows, Inflation Lingers
Weekly Economic Review: March 21, 2025
The Fed held interest rates steady, forecasting lower economic growth and higher inflation; retail sales rebounded but were weaker than expected due to a pullback in discretionary spending; existing home sales advanced, supported by higher inventory and better weather.
The U.S. stock market experienced modest gains this week, ending a streak of weekly losses, though it remains down for the year. The market responded positively to the Federal Reserve’s decision to maintain interest rates, despite ongoing concerns about weaker earnings due to tariffs.
The week began with disappointing economic data, particularly in retail sales. Although retail sales rebounded in February, they fell short of expectations. Additionally, the January figures were re-vised downward, marking the largest drop since July 2021. This, combined with lower consumer and business confidence, slowing income growth, and rising job insecurity, has heightened concerns about consumer spending and the resulting impact on economic growth.
The Federal Open Market Committee (FOMC) voted to maintain interest rates in the range of 4.25% to 4.50% for the second consecutive meeting and to decelerate the reduction of its balance sheet (which has the effect of reducing upward pressure on rates). The Fed lowered its economic growth forecasts for this year while raising its inflation projections. Also, they continued to antici-pate a half percentage point reduction in rates this year, suggesting two quarter-point cuts.
Existing home sales rebounded in February, coming in higher than expected. This was driven by increased inventory of homes and better weather. Sales increased in the West and South, which were previously impacted by Los Angeles wildfires and severe winter storms, respectively.
Let’s examine in more detail the retail sales, the FOMC meeting, and existing home sales an-nounced last week.
Retail Sales: According to the Commerce Department, retail sales rose by 0.2% month-over-month in February, following a revised decline of 1.2% (previously reported as -0.9%) in January. The February figure was below the market expectation of a 0.6% increase. Annually, retail sales grew by 3.1% in February, compared to a 3.9% rise in January.
Sales increased in five of the 13 categories tracked by the Commerce Department, with the largest gains seen in non-store retailers (e-commerce) and health and personal care stores. Conversely, sales from food service and drinking places, the only service sector category, experienced its most significant decline in a year.
Control-group sales, which exclude food services, auto dealers, building materials stores, and gasoline stations and are used to calculate GDP, rose by 1.0% in February after a revised decline of 1.0% (previously reported as -0.8%) in January. The February figure exceeded market expec-tations.
FOMC Meeting: The FOMC released its updated Summary of Economic Projections (SEP). The key takeaways from the updated SEP are as follows:
- The Fed’s rate projections (Dot Plot) remain unchanged from December, indicating a 50-basis point cut by the end of 2025. This would bring the federal funds rate target range to 3.75% to 4%, implying two 0.25% cuts, with a year-end median rate forecast of 3.9%.
- GDP growth is expected to be 1.7% in 2025, revised down from the December forecast of 2.1%. Growth is projected to increase slightly afterward, with a longer-run growth rate of 1.8%.
- The unemployment rate is forecast to be 4.4% in 2025, revised up from the December forecast of 4.3%. It is expected to remain at 4.3% afterward, with a longer-run rate of 4.2%.
- Headline PCE inflation is projected to be 2.7% in 2025, up from the 2.5% forecast in December. It is expected to decrease to 2.2% in 2026 and further decline to 2.0% in 2027 and beyond.
- The Fed will reduce the pace of runoff from its securities holdings on the balance sheet. Starting in April, the cap on monthly Treasury redemptions will be reduced from $25 billion to $5 billion, while the cap on mortgage-backed securities reductions will remain at $35 billion.
Existing Home Sales: According to the National Association of Realtors, sales of existing homes increased by 4.2% to an annualized rate of 4.26 million units in February from 4.09 million units (revised up from 4.08 million) in January. This increase in home sales is in sharp contrast to the expected drop in sales of 3.2%. On an annual basis, sales declined 1.2% from 4.31 million units a year ago. The South and West experienced growth, the Midwest remained unchanged, and the Northeast declined in February. The median price in the West was $614,600, up by 3.6% from a year ago.
The inventory of unsold existing homes for sale increased by 5.1% to 1.24 million in February, still well below the 1.9 million pre-pandemic level but up 17% from a year earlier. The Months Supply of Inventory (MSI), measuring the number of months it would take for the current inventory of homes on the market to sell at the current sales pace, was 3.5 months in February, unchanged from Jan-uary and up from 3.0 months year-over-year. A four-to-seven-month supply is considered a healthy balance between supply and demand.
In February, first-time homebuyers accounted for 31% of sales, up from 28% in the prior month and from 26% year-over-year. All-cash sales made up 32% of purchases, up from 29% in Janu-ary but down from 33% a year ago. 50% of the homes sold were on the market for less than a month, up from the prior month. Homes stayed on the market for an average of 42 days in February, up from 41 days in January and 38 days a year ago.
On a concluding note, Fed Chair Powell noted that the economy and labor market remain strong, but acknowledged challenges from trade, immigration, and fiscal policy uncertainties. He described the tariff impact on prices as “transitory,” while emphasizing that the Fed cannot predict the exact outcome and will need to observe how tariffs ultimately affect the economy. During the early days of the pandemic, Powell’s characterization of inflation as transitory proved incorrect, leading to criticism for the Fed’s slow response to the inflation surge driven by the pandemic.
Powell also mentioned that the Fed considers both hard and soft data, with a focus on hard data such as employment and job openings. He downplayed the significance of recent soft data, such as lower confidence and higher inflation expectations from consumer and business surveys, label-ing them as outliers with no strong historical correlation. However, some market participants are concerned that if higher inflation expectations persist, they could become more enduring, pushing up prices and compensation, and potentially compelling the Fed to maintain higher interest rates for a longer period.
A week ago, the market predicted two solid 0.25% rate cuts. Now, it forecasts a 100% probability of three 0.25% rate cuts in 2025, totaling 0.75%. The first 0.25% rate cut is expected at the June FOMC meeting, followed by a second in September and a third in December. The two, five, and ten-year Treasury yields ended at 3.94%, 4.00%, and 4.25%, respectively, rising by 8, 9, and 6 basis points compared to their levels a week ago.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
_______________________________________________________________________
All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.
