Michelle ThompsonThe U.S. central bank has downgraded its growth forecast, citing concerns that President Donald Trump’s tariffs are “clearly” contributing to rising prices. The Federal Reserve released its updated projections on Wednesday while maintaining its benchmark interest rate at 4.3%, where it has remained since December. This decision, which was widely anticipated, reflects the Fed’s desire to monitor the impact of the White House’s policies.
Following the announcement, Trump, who has previously criticized the Federal Reserve, called for rate cuts, stating on his Truth Social platform, “The Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy.” He added, “Do the right thing. April 2nd is Liberation Day in America!!!”
Fed Chairman Jerome Powell noted that, despite a decline in sentiment and high uncertainty, the economy still appeared healthy. However, he warned that tariffs—taxes on imports—would likely slow economic growth and hinder the Fed’s ability to stabilize prices, pointing to recent data showing increased goods prices. “Clearly some of it, a good part of it, is coming from tariffs,” Powell said after the Fed’s announcement. “Progress is probably delayed for the time being.”
Since taking office in January, Trump has introduced a series of new tariffs while also pushing for significant tax cuts, regulatory reforms, and reduced government spending. Economists have cautioned that these policies could cause short-term price hikes and create uncertainty for businesses. Analysts suggest that these concerns have contributed to a stock market sell-off, with the S&P 500 falling 10% from February, returning to levels last seen in September.
Trump has acknowledged that his tariffs may cause “a little disturbance” but insists that the policies will result in long-term economic growth.
Concerns about inflation and an economic slowdown.
The situation has added to the challenges facing the Federal Reserve, which has spent much of the past three years working to stabilize prices and prevent an economic slowdown.
Mr. Powell stated that the bank expects tariffs to cause a one-time price increase rather than a sustained rise, but it is also preparing for a potential impact on growth.
Forecasts now predict inflation will reach 2.7% by the end of the year, higher than the 2.5% previously expected in December.
Growth is projected to be just 1.7% this year, down from an earlier forecast of 2.1%.
Although the Fed kept interest rates steady on Wednesday, the outlook indicates that rate cuts are still anticipated by the end of the year.
The Fed also announced it would slow the sale of assets, such as government debt, effectively providing more economic support.
“For now, the Fed is in a wait-and-see mode, monitoring whether the recent slowdown turns into a more serious issue,” said Whitney Watson, co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management. Stock indexes in the US rose following the announcement, with the S&P 500 closing up over 1%.
Kevin Hassett, director of the National Economic Council, downplayed concerns about the tariff impact.
“Chairman Powell is clear that any tariff effect would be temporary,” he said, emphasizing his respect for the Fed’s independence.
The Fed began raising borrowing costs in 2022 to cool the economy and reduce inflationary pressures. Inflation, which had reached 2.8% as of February, remains above the Fed’s 2% target.
Recent surveys indicate a decline in public sentiment, with inflation expectations rising, making it harder for the Fed to stabilize prices.
Consumers expecting prices to rise may rush to buy, which can drive inflation as businesses raise prices to meet demand.
“The challenge for the US is that inflation remains a major risk, with consumer expectations increasingly deviating from the 2% target,” said Lindsay James, investment strategist at Quilter.
“While demand indicators in the US may be slowing, inflation persists and could spiral if current economic policies continue.”
Mr. Powell noted that the Fed is closely monitoring surveys but has not yet seen any alarming signs in the “hard data.”
“We’re in no rush and are well-positioned to wait for more clarity,” he stated.
