The Takeaway
In the first quarter of 2025, the Federal Reserve maintained a cautious approach by keeping the target federal-fund rate unchanged, following a cumulative 100-basis-point rate cut implemented in the latter part of 2024.
The US Personal Consumption Expenditures Price Index, or PCE, inflation was still above the 2% target set by the Fed.
The first quarter witnessed higher nonfarm payroll, or NFP, employment, and a marginally higher unemployment rate.
The Fed maintained the target federal-funds rate at 4.25% to 4.50% in both the January and March 2025 Federal Open Market committee meetings in line with the outlook set in the last quarter of 2024. Sticky inflation and stable economic outlook facilitated the Fed's decision to maintain status quo in interest rates. The longer maturity treasury term rates saw a significant decline of 30-40 basis points, resulting in significant positive returns for the US bond market for the fourth quarter. The Morningstar US Treasury Bond Index provided the best risk/return characteristics over the first quarter of 2025. This was followed by the Morningstar US Corporate Bond Index. The Morningstar US High-Yield Bond Index and the Morningstar US 1-3 Month Treasury Bill Index experienced muted returns over the first three months of 2025.
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