Markets this week danced to a familiar rhythm—central banks, inflation fears, and investor caution. The sports world joined the action this week as the NCAA Championship, famously known as “The Big Dance,” tipped off yesterday. As expected from the notoriously unpredictable 5-seed vs. 12-seed matchup, brackets were busted last night as 12-seed McNeese State pulled off a thrilling 69–67 upset over the 5-seed Clemson Tigers. Since the expansion of the NCAA Tournament field in 1985, there have been 56 victories against No.5 seeds, resulting in a win rate of 35.7%, including McNeese State’s victory over Clemson last night. This upset echoes recent events in markets, where expectations were set, but reality delivered a different result.
The US Federal reserve announced its second monetary policy decision of 2025 earlier this week, following a two-day Federal Open Market Committee (FOMC) meeting, and as no surprise to many, voted to keep the benchmark interest rate steady at 4.25% to 4.50%, in line with expectations. While the decision to hold rates grabbed headlines, a more subtle shift emerged in the Fed’s approach to quantitative tightening, signaling potential adjustments ahead regarding the Federal Reserve’s balance sheet.
Federal Reserve officials announced an adjustment to their strategy for reducing their $6.75 balance sheet, that saw most of its growth during the peak of the COVID-19 pandemic. For the past several years, the central bank has been reducing the size of their portfolio of Treasurys and mortgage-backed securities. Previously, the Federal Reserve was allowing $25 billion of US Treasuries and $35 billion of mortgage-backed securities to roll off their balance sheet, without the possibility of principal on those securities to be reinvested back into the market. As of April 1st, of this year, officials said that they would slow down the pace of that runoff, by reducing the runoff cap on US Treasuries $5 billion, and left the cap for mortgage-backed securities unchanged. As the Federal Reserve presses forward with reducing its balance sheet and debt ceiling negotiations remain at a standstill in Washington, markets could be in for a bumpy ride, with investors bracing for uncertainty on multiple fronts.
The New York Fed’s Empire Manufacturing Index, reported on March 17, posted a steep drop to -20, missing the projected -1.9 and signaling a significant decline in the sentiment of manufacturing activity. Extending the soft momentum seen on Monday from the manufacturing sector, February building permits fell by 1.2%, accelerating from January’s 0.6% decrease and signaling further housing market weakness.
Looking into financial markets, treasury yields edged lower on Friday as early signs of weakness in the stock market prompted the buying of US Government debt. Soft economic data and Fed Chair Jerome Powell’s reassurance on Wednesday that tariff-induced inflation is seen as “transitory”, have also played a role in dragging yields lower. Jerome Powell calling tariff-induced inflation “transitory”, brought flashbacks to many market participants who recall the same language being used in March 2021 to characterize rapidly increasing inflation brought on by the COVID-era stimulus. While the term “transitory” sparked skepticism, this round of inflation is fundamentally different from the pandemic-era surge. In 2021, inflation was driven by demand shocks, fueled by direct stimulus payments and widespread supply chain bottlenecks. Tariff-induced inflation, by contrast, reflects a narrower, more targeted cost increase, primarily affecting select imported goods. These effects tend to fade over time as markets adjust, supply chains reroute, and consumers shift their behavior through substitution toward untaxed or domestically produced alternatives. Additionally, since the Fed’s preferred inflation gauge, the PCE index, rebalances monthly to reflect actual consumer spending patterns, it is likely to show a more muted impact from tariff-related price increases than the CPI, which uses a fixed basket.
Market participants will turn their focus to next week’s data on housing, jobs, and consumer trends, which could provide clearer signals on where the economy is headed. With recent reports pointing to some signs of slowing, investors will be watching to see if this continues or if conditions begin to stabilize.
Have a great weekend everyone!
Carson Francis
Senior Vice President, Financial Strategies Group