WASHINGTON: New economic projections from Federal Reserve officials this week will provide the most tangible evidence yet of how U.S. central bankers view the likely impact of Trump administration policies that have clouded a previously solid economic outlook.
Top forecasters have marked down their expectations for growth this year, upped the perceived risk of recession, and anticipate higher inflation as President Donald Trump’s stiff new tariffs on imports filter through global markets, with even broader levies anticipated next month.
Starting from what some policymakers called a “sweet spot” of steady growth and balanced risks, more difficult scenarios are suddenly in play with a mounting sense of uncertainty around forecasts and tumbling stock markets.
“A ‘soft landing’ is still likely,” with the economy continuing to grow and inflation ebbing down to the Fed’s 2% target, said Beth Ann Bovino, chief economist for U.S. Bank.
“Still … we are starting to see several shocks. Trade wars … Consumer expectations signaling recession fears and inflation fears,” Bovino said, with Fed policy also uncertain if the Trump administration’s tariff plans rekindle the price pressures the central bank is trying to tame.
“It’s still not ugly, but the shocks are starting to add up.”
Those shocks include a painful selloff on U.S. equities markets, with the S&P 500 index last week briefly entering a technical correction with a 10% drop from its record high in February. While Fed officials typically downplay asset price swings as a factor in making monetary policy, sharp moves register since they can show both a developing loss of confidence and signal lower consumer spending as household wealth drops.
Fed likely to keep rates steady
The Fed is expected to hold its benchmark interest rate steady in the 4.25%-4.50% range at the end of its two-day policy meeting on Wednesday. That rate has been in place since December, when the median projection among policymakers saw two quarter-percentage-point cuts in 2025; investors currently anticipate three such reductions.
Updated outlook
Officials’ median expectation in December saw the U.S. economy growing 2.1% this year, with the unemployment rate rising slightly to end the year at 4.3% and the Personal Consumption Expenditures Price Index, which is used for the central bank’s 2% inflation target, ending the year at 2.5%.
But those projections were issued before Trump’s policy plans became more concrete, with the doubling of tariffs on goods from China, a new 25% tax on imported steel and aluminum, a 25% levy on most goods from Mexico and Canada now set to go into effect next month, and global “reciprocal” tariffs also coming that would match duties other countries place on U.S. goods.
A complicated undertaking, Trump’s plans have drawn a comparison to the tariffs imposed in the 1930s that worsened the Great Depression, and led members of Trump’s own administration to say there may be painful adjustments on the way.
The Fed’s 19 policymakers will have their say in the updated projections, which are due to be released along with the central bank’s latest policy statement at 2 p.m. (1800 GMT) on Wednesday.
Public statements prior to the meeting pointed to three developing scenarios: slowing inflation or a weakening economy that allows further rate cuts; inflation stuck above the Fed’s target that leaves monetary policy tighter for longer; and inflation remaining higher than desired but the economy also slowing. That last one would present a potential dilemma that may force a choice between the Fed’s inflation and employment goals.
In a recent analysis, Deutsche Bank economists noted several difficult judgments Fed officials will have to make. It may be hard to figure out which tariff price effects will disappear on their own and which will stick, for example. Increasing unemployment also might reflect a modest weakening at first, but spiral into something worse as layoffs lead to weak demand, which in turn leads to more layoffs and even weaker activity. Inflation expectations may be anchored for now, but “greater dispersion and uncertainty … indicate that they are less reliably anchored,” the analysts said.
“Either the economy remains resilient and high inflation keeps the Fed mostly on hold, or the slashing of government employment combined with a trade uncertainty-induced freezing in private-sector hiring leads to a sharp deterioration in the labor market that necessitates a steeper path of cuts,” Matthew Luzzetti, the investment bank’s chief U.S. economist, and his team wrote. “Divining which path is correct is not easy.”
While their baseline is for “resilient growth and sticky inflation” and the Fed remaining on hold on rates, rising recession risks have become part of the discussion.
Wider tails
Others also see risks tilted to the upside.
“There’s an increasing risk that supply-side shocks from tariffs, decelerating immigration growth trends, and curbs on the federal government workforce will create a lasting negative feedback loop that weakens aggregate demand,” wrote Satyam Panday, chief U.S. and Canada economist for S&P Global Ratings.
Panday put the risk of a U.S. recession over the next 12 months at 25%, twice the norm.
Economists in a recent Reuters poll were nearly unanimous in saying that the risks of a downturn have risen. That may not be immediately apparent in the new Summary of Economic Projections that the Fed will release on Wednesday.
With recent data still decent and Trump’s plans in flux – and in some cases facing court-ordered reversal – the numbers penciled in by policymakers may not show much of a shift from December.
Gregory Daco, chief economist at EY, expects the median forecast for the Fed’s policy rate to be two quarter-percentage-point cuts this year, as in December, alongside slightly slower expected growth, a bit higher unemployment, and no change from December’s 2.5% year-end inflation projection.
But the range of views among policymakers may also start to widen, reflecting less confidence in baseline forecasts, more risk, and greater uncertainty – factors captured in separate surveys of policymakers released along with the projections.
During the COVID-19 pandemic, those surveys showed unanimous agreement at times that the outlook was more uncertain than usual, but they had been improving.
In comments in New York on March 7, Fed Chair Jerome Powell set the current mood, with a reference to the tail risks that are implicit in the economy and society at large.
“Human nature is that we always talk about uncertainty in how we understand things. ‘Highly uncertain.’ We say it all the time,” Powell said. “The tails are fatter than you think.”
