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The Federal Reserve has downgraded its US growth predictions while increasing its inflation expectations, highlighting worries that Donald Trump’s tariffs may negatively influence the world’s largest economy.
The Fed’s most recent projections indicate that officials now anticipate GDP growth of 1.7 percent for this year, alongside a forecasted inflation rise of 2.7 percent. Following a two-day meeting on Wednesday, policymakers maintained the central bank’s primary interest rate.
Fed chair Jay Powell informed reporters after the meeting that the US president’s strategy of imposing extensive tariffs on trading partners has affected the Fed’s outlook regarding inflation and the economy.
“Clearly some of it, a significant portion of it,” is associated with the repercussions of Trump’s tariffs, Powell remarked, suggesting that these tariffs “often reduce growth and elevate inflation.” He further asserted that the Fed did “not need to act hastily” regarding rate adjustments in view of the “unusually high” uncertainty.
Powell noted that progress on inflation may be “probably postponed for the foreseeable future.” The Fed has been striving to reduce inflation back to its 2 percent target and manage the most intense inflation pressure observed in decades.
The Fed also revealed that it is decelerating the speed of its quantitative tightening program, lowering the monthly reduction of US Treasury debt from $25 billion to $5 billion beginning in April.
US equities reached their peak of the day following the Fed announcement, with the S&P 500 climbing 1.1 percent and the technology-heavy Nasdaq Composite appreciating by 1.4 percent.
US government bonds also surged, causing the yield on the benchmark 10-year Treasury to drop by 0.04 percentage points, settling at 4.25 percent.
Ed Al-Hussainy from Columbia Threadneedle Investments stated: “The positive takeaway for risk is that the Fed anticipates higher inflation but not at a level sufficient to alter their rate-cutting trajectory.”
These new projections represent a significant change from December, when officials on the Federal Open Market Committee, the central bank’s policy-setting body, predicted a 2.1 percent growth rate for 2025 and estimated the widely monitored personal consumption expenditures inflation measure would finish the year at 2.5 percent.
This meeting was especially critical for the US economy, as Trump has committed to substantial cuts in federal spending and expansive tax reductions. He has implemented steep new tariffs on imports, igniting a global trade conflict.
Surveys indicate that US consumers and businesses are increasingly anxious about these tariffs, which have diminished demand and escalated price pressures.
The Fed’s new forecasts “essentially indicate that we are navigating a stagflation economy, characterized by sluggish growth and rising inflation,” asserted Torsten Slok, the chief economist at investment firm Apollo.
“On one hand, stagflation presents a complex challenge for the Fed — should they prioritize growth, which would necessitate rate cuts, or respond to rising inflation, indicating that they should raise rates?”
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A statement released by the FOMC on Wednesday, following the decision to maintain the target range for the benchmark federal funds rate between 4.25 percent and 4.5 percent, indicated: “Uncertainty regarding the economic outlook has intensified.”
The latest so-called dot plot projections reveal that Fed officials generally anticipate one or two further quarter-point rate cuts this year, consistent with December’s expectations, after a 1 percentage point reduction in 2024. However, four FOMC members now foresee no cuts this year, a shift from one member’s outlook in December.
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Investors are anticipating two to three quarter-point cuts by the end of 2025.
Fed governor Christopher Waller opposed the decision to decelerate quantitative tightening, contending that the current rate of $25 billion a month is still appropriate.
All voting FOMC members supported the decision to maintain the current rates.
