Why is the Fed So Nervous Right Now?
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In today’s edition of The Daily Brief:
Why is Jerome Powell nervous?
The shape of our remittances
Why is Jerome Powell nervous?
The Federal Reserve just had a meeting. On the surface, it was a meeting where nothing happened: after all, the Fed kept rates exactly where they were.
And yet, once you read between the lines, the Fed’s announcement was packed with information. When you really look into what Chairman Jerome Powell was saying, there are some serious anxieties about the future. That’s what we’re going to break down.
Fed's decision and rate cut expectations
First things first: the Federal Reserve held interest rates steady at their current range of 4.25% to 4.5%. Basically, after slashing interest rates by a combined 1% towards the end of last year, the Fed froze rates ever since President Trump came into power.
Frankly, this is what people expected. Everyone’s more interested in the Fed's future outlook. And that seems stable on the surface. Despite all the economic uncertainty we're facing, the Fed is sticking with its previous projection of two quarter-point rate cuts for 2025. Its so-called "dot plot" shows that the median committee member still expects the federal funds rate to end the year at 4%.
The word “median”, though, does a lot of heavy lifting here. Because once you dig in — there's actually a lot of disagreement within the committee. Out of 19 FOMC members, nine align with the median expectation of two quarter-point cuts this year. But four members expect only one cut, four expect no cuts at all, and two feel extra-dovish, expecting three cuts. In all, the Fed isn’t really keeping a unified front. And given all the economic cross-currents and uncertainty we're seeing, you can see why.
During the press conference, Chairman Powell effectively ruled out a cut anytime soon. In his words, "We're not going to be in any hurry to move. We're well positioned to wait for further clarity." In other words, things won’t change in a hurry. We probably won’t see a rate cut until the third quarter. And even that depends on incoming data.
Why do we find this interesting? Well, because their President seems to think otherwise:
After last year’s rate cuts, the Fed says that rates are now "meaningfully less restrictive" than they were last year. But now, they’d rather wait and watch. They want more concrete evidence on inflation or labor market weakening before making moves. That seems like a smart policy in a time of uncertainty.
Growth and inflation revisions
Here's where things get concerning. See, along with a decision on rates, the Fed also tells you what it generally thinks about the economy. And this time around, the Fed is NOT confident about where things are headed. It significantly downgraded the country’s economic growth forecast, while simultaneously raising inflation projections.
It expects GDP growth of just 1.7% this year, down from its previous forecast of 2.1%. And that subdued growth might continue into the future. It lowered growth expectations for 2026 to 1.8%, down from 2%, and for 2027 to 1.8%, down from 1.9%.
At the same time, it revised its core PCE inflation forecast for this year upwards to 2.8%, from its previous estimate of 2.5%. That's a substantial upward revision. It suggests we might be stuck with above-target inflation for longer than previously thought.
This combination — slowing growth and climbing inflation — is every economist’s worst nightmare. Some are getting flashbacks to the ‘stagflation’ era of the 1970s (even though we aren’t anywhere near those levels).
Expect fewer jobs as well. The Fed nudged its unemployment rate projection up slightly to 4.4%, though its longer-term projections remained unchanged.
What's driving these revisions? In part, it seems to reflect concerns about how growth might fall, because the government plans to spend less, even as it increases tariffs. As one analyst from ING put it, these factors are "threatening to squeeze both household spending power and corporate profit margins."
Things aren’t all bad, though. Powell emphasized, during his press conference, that this inflation will probably just be in the short term. He highlighted that longer-run market measures of inflation expectations remain "well anchored". In his words, "You see expectations moving up a little bit at the short end — but not at the longer run, which is where it really matters." This is probably why the Fed feels comfortable maintaining its projection of two rate cuts this year, even as it raises its near-term inflation forecast.
Powell on politics, tariffs, and immigration
At the press conference following the meeting, reporters pressed Powell on everything from President Trump's comments to tariffs to immigration policy. The result, to us, was fascinating. Clearly, President Trump’s beliefs are very different from those of his key economic policymakers. While Powell couldn’t disagree with him directly, there are clear differences between him and the President.
When asked about President Trump's demand that interest rates "drop immediately" — which the President apparently made during a meeting in Davos — Powell was diplomatic but firm. He refused to comment directly, simply stating: "The public should be confident that we will continue to do our work as we always have—focusing on using our tools to achieve our goals, and really keeping our heads down and doing our work."
On tariffs, Powell said the Fed is in a "wait and see" mode regarding the administration's policies on tariffs, immigration, fiscal policy, and regulatory changes. "We don't know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy," Powell stated. "We're only just beginning to see—actually, are not really beginning to see much, and I think we need to let those policies be articulated before we can even begin to make a plausible assessment."
When asked specifically about the inflationary impact of tariffs, Powell said, "It is going to be very difficult to have a precise assessment of how much is coming from tariffs." He noted that while tariff-induced inflation was transitory in 2018-19, this is a different time. We’re already starting with excess demand. Who knows what happens when supply falls. Moreover, there are many other factors to consider, including retaliation, the manner in which tariffs unfold, and how workers react.
On immigration, Powell acknowledged that the flows across the border have "decreased very significantly." He noted this could be contributing to the stability of the unemployment rate because job creation has otherwise slowed as well. When pressed about the potential impact of deportations on the labor market, Powell mentioned anecdotal reports of labor shortages in sectors dependent on immigrant labor, though "you don't see that in the aggregate data yet."
The most telling moment came when Powell admitted to the extraordinary uncertainty in the current environment. "I don't know anyone who is confident of their forecast," he said. This admission highlights just how challenging the economic landscape has become.
Quantitative tightening adjustments
Perhaps the most significant policy change announced yesterday was the Fed's decision to slow the pace at which they're “shrinking their balance sheet.” When the Fed shrinks its balance sheet, in a loose sense, it reduces banks’ reserves — which reduces how much money they can lend. This is also known as ‘quantitative tightening’ or ‘QT’.
Starting in April, the Fed will reduce the monthly cap on Treasury securities that can roll off its balance sheet — from $25 billion to just $5 billion. Meanwhile, they'll maintain the monthly redemption cap for mortgage-backed securities at $35 billion. This might sound arcane to you, but here’s what it means: ever since the inflation boom after COVID-19, the Fed has been trying to pull money out of the system. After all, there was simply too much of it splashing around the economy, which caused all that inflation. Now, however, the Fed no longer feels like it has the space to do so.
Powell explained this decision by saying, "We have seen some signs of increased tightness in money markets."
This move seems designed to avoid a repeat of what happened in September 2019. Back then, the shrinking of the Fed's balance sheet drained far too much money from the system. This shortage of money created severe disruptions in overnight funding markets. In a single day, the overnight repo rates suddenly spiked from around 2% to nearly 10%.
So, why might this happen? See, in January, the United States government hit its ‘debt ceiling’. That means, it can’t issue more debt without going to Congress. And right now, the way American politics stands, there’s no guarantee that Congress will let that happen.
So what does the government do? Well, the US Treasury Department has one trick up its sleeve. It has an account with the Fed — called the Treasury General Account (TGA). Because the government can’t take on more debt, it’s withdrawing money from this account and spending it. All that money lands up in the banking system.
So far, so good. But eventually, Congress will raise the debt ceiling. Forecasters estimate that this will need to happen by August. At that point, the Treasury will rapidly rebuild its cash balance at the TGA. That will drain all the excess money it’s currently adding to the banking system. Do this too quickly, and you have a repeat of September 2019.
As Roberto Perli, the New York Fed executive who oversees the balance sheet, put it, slowing the runoff is a "tactical decision" that "doesn't change the end goal" of reducing reserves. The Fed still wants to drain money from the system, but it doesn’t want to do it so quickly that it ends up creating new problems.
Conclusion
So what's the takeaway from all this? The Fed is clearly in a cautious, wait-and-watch mode. They're balancing multiple uncertainties - from the inflationary potential of tariffs to the growth impacts of immigration policy changes to the technical challenges of managing liquidity in the financial system.
The downgraded growth forecasts combined with higher inflation projections are concerning, and suggest the economy might be heading for a rougher patch than previously expected. While Powell maintains that the economy remains "strong" and the labor market "solid," the Fed's own projections tell a slightly different story.
For investors and consumers, the message is clear — things are up in the air right now. Don't expect the Fed to do much, at least until things settle down.
The shape of our remittances
A month ago, we decided to dig around the topic of remittances. It was a slow day, we didn’t know what else to cover, and this felt like a good thing to glance through. We definitely didn’t expect to have our minds blown.
What we didn’t realize at first was that remittances are a huge deal — at least for India. They’re a $100 billion annual injection of money into our economy. That’s huge. Given their sheer scale, remittances are every bit as crucial as any other macro-level economic force, like foreign investment, trade balances, or government schemes. They’re way more important than foreign aid. What’s more, they’re immune to all the problems of top-down economic programs: they’re means-tested (sort of), they’re free from corruption, they’re safe from budget cuts… They’re a massive, under-appreciated boon for our economy.
If you want to understand India’s economy and its place in the world, remittances have to be part of your mental framework.
Before this, we had a hazy idea of India’s remittance inflows. But the RBI, now, has come out with a new paper that fills in the details, tracing the way our remittance flows have evolved over the last few years. There were a few bits in there that really sent our mental wheels spinning. And so, as always, we thought we’ll fill you in as well.
Remittances are a big deal for India
India has a weird but special relationship with the world. We are the world’s most populous country, and for better or worse, our own economy is still too small to give all these people a good life. The rest of the world, therefore, sees us as the world’s foremost supplier of labour. We send out hundreds of thousands of workers to the rest of the world every year, and they send money back to us. As of 2024, 6% of the world’s migrants come from our country.
All this money adds up. It’s easy to miss just how vital that money is to India’s economy, but make no mistake — it’s huge. Over the last decade, our remittance flows have consistently surpassed foreign direct investment (FDI) inflows. In 2023-24 alone, in one single year, India received $118.7 billion in remittances — more than twice the amount it did in 2010-11.
For individual families, this money is vital. It helps them pay for key needs — like education, healthcare, or housing. But add them all together and they’re a powerful economy-wide stabilizing force.
Think about it: we’re a rather fragile economy that’s still coming into its own. We depend on other countries for things that are essential for our survival — such as energy, fertilizers, or military equipment. We’re still decades away from meeting our manufacturing potential, and our position in the world depends on a handful of breakout industries, like pharmaceuticals, or IT outsourcing. This is a precarious position to be in. Through all of this, remittances are like giant shock absorbers. They ensure that small disturbances in our trade position don’t turn into full-blown crises.
Consider this, for instance: remittances can finance around 42% of India’s trade deficit. That is, even if we face some sort of economic catastrophe — for instance if foreign investments dry up during a financial crisis — we’ll still have some stability.
This isn’t a temporary phenomenon. We’ve been the world’s leading labour supplier for decades. Every year since 2008, we have been the world’s largest destination for remittances. In 2024, ~14% of global remittances came to us.
If anything, our remittance receipts are only growing. As our working-age population continues to rise — with our peak expected to only come in 2048 — we’re positioned to send more and more workers abroad every year. As per RBI projections, by 2029, our remittance inflows could balloon to $160 billion.
If you want to understand remittances, look at who goes where
If you want to really understand India’s remittance economy, you have to begin by figuring out who goes where. Because behind the headline numbers, there’s a dramatic change. While we have been supplying labour to the world for years, and will perhaps continue to do so for many more, the sort of labour we’re providing has changed. Increasingly, our emigrant workers are not blue-collar laborers heading to the Gulf, but highly skilled professionals moving to Western economies.
See, there’s an old pattern in how Indian workers moved. Historically, the bulk of India’s remittances came from the Gulf. Indian migrant workers would travel there for low-paying blue-collar jobs, in industries like construction and hospitality, or even as domestic labor. This is why, for decades, countries like the UAE, Saudi Arabia, and Kuwait accounted for a majority of our remittance inflows.
Over time, however, things have changed. A new trend has emerged over the last five years. Increasingly, our remittances are coming from the world’s advanced economies, from a growing pool of highly skilled emigrants — who are working well-paying jobs in sectors like technology, business management, or the sciences. In FY 2024, for instance, more than half of our remittances came from the United States, the United Kingdom, Singapore, Canada, and Australia. The United States, specifically, is now India’s largest source of remittances, contributing 27.7 percent in 2023-24 — up from 23.4 percent just three years ago.
Some of this is just a function of how our people have evolved. Some of it is a result of active policy interventions. For instance, in May 2021, India and the United Kingdom signed a ‘Migration and Mobility Partnership’. In less than three years, the agreement tripled the number of Indians emigrating to the United Kingdom, from 76,000 a year at the end of 2000 to 250,000 a year by the end of 2023. This left a clear imprint in our remittance flows — the UK’s share of Indian remittances surged from 6.8 percent in 2020-21 to 10.8 percent in 2023-24.
That isn’t to say that the Gulf is irrelevant. Gulf economies, as a whole, still contribute 38% of our remittances. The UAE remains the second-largest source of remittances, at 19.2%. And in sheer numbers, the gulf takes in more Indian workers than anywhere else. But purely in Dollar terms, the Gulf has slowly become less salient to us.
This shift has deep implications. A single software engineer in California or an investment banker in London can send home as much money as ten construction workers in the Gulf. It also makes our remittance flows more resilient. In the Gulf, remittances are hostage to oil price fluctuations, migration restrictions, or sudden layoffs. During the COVID-19 pandemic, for instance, there was a marked drop in the remittances we received from the Gulf. In contrast, Indian professionals in advanced economies have much better job stability.
For best results, make remittances cheap
Here’s a tragedy: although remittances are vital to our economy, a lot of remittance money — billions of Dollars, in fact — is lost to transaction charges.
Sending remittances is far more expensive than it should be. As per the United Nation’s Sustainable Development Goals (SDG), no more than 3% of remittance money should be lost to transaction costs. The world average, though, is more than twice as much: at 6.65%. India does better, with an average cost of 4.9%, but this is still much higher than is ideal.
More importantly, small remittances, i.e. those under $200, are disproportionately burdened by these high fees. That is, the very poorest migrants — whose families presumably need that money the most — lose the most money to processing fees.
Why so? See, there are many ways that people send money home: from standard banking channels to Money Transfer Operators, like Western Union, to modern-day Fintech companies.
Where you send money from, and how you send it, matters enormously to the costs you have to pay. Bank transfers through the SWIFT system, for instance, are the most expensive, with fees as high as 11.9% for small transfers. At the other end of the spectrum, fintech-driven remittance services using India’s Rupee Drawing Arrangement (RDA) offer far cheaper rates, with costs as low as 1 percent for large transfers.
All of this tells us that, with time, we need to double down on digital infrastructure. India’s getting there slowly, integrating its UPI network with global payment networks, such as Singapore’s PayNow. As digital adoption increases, remittance costs should fall, benefiting millions of Indian families. The key challenge, though, is ensuring that the benefits of this digitization extend to the smallest transactions.
The bottom line
Remittances are important to our economy. We’ve already talked about this. But that’s not all that we found interesting about the RBI paper. What’s more interesting, to us, is the story they tell about how India fits into the world. Remittances are the economic echoes of millions of Indians chasing opportunities abroad while tending to families spread across continents. Where a country like China is famous for exporting goods, In India, we export talent. And the kind of talent we send out is changing. Increasingly, we export knowledge workers rather than manual laborers, marking a profound shift in India’s role in the world.
But there’s a challenge here, too. While remittances have been a crutch for India’s external finances, they’re not a substitute for long-term economic self-sufficiency. The fact that remittances fund 42% of our trade deficit is both reassuring and revealing—it buys us stability, but it also highlights just how dependent we remain on this money.
Then, there’s a final piece: cost. Every dollar lost to fees is a dollar that doesn’t reach a family in India. If fintech and digital infrastructure can slash these costs, then remittances could become even more powerful — channeling more money to the people who need it most.
Tidbits
UltraTech Cement, a part of the Aditya Birla Group, has increased its domestic production capacity to 178.86 million tonnes per annum (mtpa) with an additional 1.2 mtpa through debottlenecking at its Hirmi Cement Works (0.8 mtpa) and Roorkee Cement Works (0.4 mtpa). This expansion brings the company's total production capacity, including overseas operations of 5.4 mtpa, to 184.26 mtpa.
The Union Cabinet has approved a ₹1,500 crore incentive to promote low-value BHIM UPI peer-to-merchant (P2M) transactions in FY25, aiming to push total UPI volumes to 200 billion. The scheme offers a 0.15% incentive for transactions up to ₹2,000 made to small merchants, while large merchants in the same bracket receive no incentive. Transactions above ₹2,000 will not qualify for incentives. Industry estimates suggest ₹4,000-₹5,000 crore is required to sustain the UPI ecosystem, as the sector remains MDR-free.
State-owned issuers NABARD and SIDBI raised ₹14,000 crore through medium and short-tenor bonds, shifting from their typical preference for long-term debt. NABARD secured ₹7,000 crore via 3.5-year bonds at a coupon rate of 7.48%, while SIDBI raised ₹6,000 crore through 5-year bonds at 7.39%. Expectations of RBI rate cuts in April and June influenced issuers to opt for shorter maturities, anticipating lower long-term borrowing costs later.
- This edition of the newsletter was written by Bhuvan and Pranav
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