In a candid address on Wednesday, Federal Reserve Chair Jerome Powell acknowledged after policymakers decided to keep interest rates unchanged that the Trump administration’s early economic strategies, notably the imposition of wide-ranging import tariffs, are nudging the U.S. economy towards tempered growth and a temporary uptick in inflation. This comes amid an atmosphere of “unusually elevated” uncertainty that leaves central bank policymakers grappling with future economic trajectories.
With overall sentiment deteriorating due to policy “turmoil,” inflation is now anticipated to accelerate beyond previous expectations, partly, if not chiefly, because of President Donald Trump’s intention to impose duties on key imports.
This statement followed the Fed’s latest decision to keep its benchmark overnight rate steady within the 4.25% to 4.50% corridor. Despite maintaining a projection of two quarter-point rate reductions by the end of the year, as forecasted in December, Powell underscored that these adjustments largely result from weaker economic growth counterbalancing higher inflation, compounded by the “inertia” stemming from a murky economic outlook.
Powell reaffirmed the solidity of economic fundamentals, speaking to the current unemployment rate of 4.1% and a balanced labor market. However, recent data accompanying economic projections reveal a near consensus among Fed officials: the economic outlook is more precarious than before, with risks now skewed towards decelerated growth, increased unemployment, and heightened inflation.
Should the Fed’s median forecast for the next three years materialize, this period could witness the slowest economic growth trajectory since the early days of Barack Obama’s presidency, following the recession from 2007 to 2009.
Powell also touched upon several critical themes:
- Tariff-induced inflation is described as “transitory.”
- While the economy retains robustness with “somewhat elevated” inflation, sentiment has waned.
- Tariffs tend to suppress growth rates while pushing inflation upwards.
- Inflation expectations have climbed, largely driven by tariffs, delaying the attainment of price stability.
- Despite consumer and business concerns over growth deceleration, core economic indicators remain strong.
- Should labor markets weaken, the Fed retains options to ease monetary policy.
- Conversely, sustained economic strength will allow continued restraint in policy adjustments.
- A technical choice was made to decelerate balance sheet reductions.
- Powell dismissed the notion of a ’70s-style inflationary spiral, noting that pre-tariff core inflation stood firm at 2.5%.
- Fed staff projections incorporate full tariff retaliation assumptions.
Currently, the Fed adopts a “wait and see” stance, with a minority predicting rate cuts in 2025 compared to earlier forecasts.
Looking ahead to the end of 2025, the Fed’s Summary of Economic Projections (SEP) outlines expectations for interest rates to remain unchanged at 3.75%-4%, GDP growth to fall to 1.7% from a previous 2.1% estimate, unemployment to rise slightly to 4.4% from 4.3%, and inflation to increase to 2.7% from a prior 2.5% forecast. These figures suggest a cautiously evolving economic environment as policymakers navigate the complexities introduced by trade policies and their ramifications.
