Fed Cuts US Growth Forecast as Tariff Fears Mount.
The US central bank, the Federal Reserve, has downgraded its growth forecast for the US economy, citing concerns that President Donald Trump's tariffs are significantly driving up prices and adding uncertainty to the economic outlook.
On Wednesday, the Federal Reserve released its projections for the world's largest economy, keeping interest rates unchanged. The Federal Reserve's benchmark interest rate, which has been steady at around 4.3% since December, remains unaffected for now as the central bank waits for further developments regarding the White House's policies.
President Trump, a vocal critic of the central bank, quickly reacted by calling for interest rate cuts. "The Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy," he wrote on his social media platform, Truth Social. "Do the right thing. April 2nd is Liberation Day in America!!!"
Despite Trump’s calls for action, Federal Reserve Chairman Jerome Powell, in his remarks following the announcement, maintained a cautiously optimistic view of the economy. He said, "The economy still appears healthy," but also acknowledged that "tariffs, which are taxes on imports, are likely to slow growth and hinder the Fed's efforts to stabilize prices." He highlighted recent data showing a rise in goods prices, noting that "clearly some of it, a good part of it, is coming from tariffs."
Since President Trump took office, the administration has imposed a barrage of new tariffs while also advocating for tax cuts, deregulation, and reduced government spending. Economists have repeatedly warned that these policies could push prices up in the short term and create economic uncertainty for businesses. As the impact of these tariffs continues to unfold, the broader US economy is beginning to show signs of strain. The S&P 500, a key stock market index, has fallen by 10% since February, with market sentiment growing more negative by the day.
Inflation and Economic Uncertainty
The growing uncertainty surrounding the tariffs adds another layer of complexity for the Federal Reserve, which has been working tirelessly to keep inflation under control. Powell reiterated that the central bank was still assuming the tariffs would lead to a temporary rise in prices rather than a prolonged surge. However, he also admitted that the Fed was bracing for potential negative impacts on economic growth.
The revised forecasts now predict inflation at 2.7% by the end of this year, up from 2.5% previously projected in December. Additionally, the Fed expects US growth to slow down to just 1.7%, a significant drop from the earlier forecast of 2.1%.
Despite this, the central bank has indicated that it is prepared to cut interest rates by the end of the year if needed. The Fed also plans to reduce its pace of selling assets such as government debt, a move designed to provide more support to the economy. "For the time being, the Fed is in wait-and-see mode, as it monitors whether the recent growth slowdown develops into something more serious," explained Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management.
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Interestingly, following the Federal Reserve's decision to hold rates steady, US stock indexes experienced a brief rally, with the S&P 500 rising by over 1%. This shows that despite ongoing concerns, some market participants are optimistic about the central bank's ability to manage the situation.
Kevin Hassett, director of the National Economic Council, downplayed concerns about the effects of tariffs, reiterating Powell's assertion that any tariff-related price increases would likely be temporary. "Chairman Powell is clear that if there were a tariff effect, it's a transitory one," Hassett remarked. He also emphasized that the White House respects the "independence of the Fed."
The Challenge of Inflation and Public Sentiment
The Fed has already raised borrowing costs several times since 2022 in an attempt to cool the economy and combat inflationary pressures. Inflation in the US has fallen to 2.8% as of February, but it remains slightly above the central bank’s 2% target. Meanwhile, surveys show that public sentiment has declined, with consumer expectations for inflation rising. These rising expectations could further complicate the Fed's efforts to stabilize prices.
Lindsay James, an investment strategist at Quilter, warned that the persistence of inflation and the changing expectations of consumers could lead to significant economic risks. "Leading indicators of demand may be slowing in the US, but inflation persists and risks spiraling if the proposed economic policies continue," James cautioned. He added, "The problem the US faces is that inflation remains a primary risk and is showing signs of consumer expectations becoming unanchored from the 2% target."
Despite these growing concerns, Powell expressed confidence that the Fed is in a strong position to wait for more clarity and that there is no immediate rush to take drastic action. "We're well-positioned to wait for further clarity and not in any hurry," Powell concluded.
Trump’s Role in Economic Uncertainty
While the Federal Reserve remains cautious in its approach, President Trump's policies have undeniably exacerbated economic instability. His decision to impose tariffs, combined with his constant criticism of the Federal Reserve, has created a tense environment for both businesses and policymakers. Trump's aggressive economic stance, coupled with his erratic decision-making, has led to volatility in the markets and raised concerns over the long-term sustainability of his trade policies.
Trump's tariffs, while claimed to be necessary for long-term growth, are already starting to show negative effects on the economy, with rising inflation and slower growth projected for the immediate future. His repeated attacks on the Federal Reserve and calls for lower interest rates further fuel uncertainty, creating an environment where businesses struggle to plan for the future.
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Despite his claims of boosting the economy, Trump’s economic policies have not delivered the promised results. Instead, they have left the US economy vulnerable to external shocks, with the adverse effects of tariffs being felt across various industries. The Federal Reserve's cautious approach and its decision to keep interest rates steady highlight the challenges the central bank faces in navigating the turbulent waters created by Trump's policies.
In conclusion, while President Trump continues to defend his economic approach, it is increasingly clear that his tariffs are causing more harm than good. The Federal Reserve’s latest forecast and its continued monitoring of the situation serve as a reminder of the economic risks his policies have created. Trump's inability to acknowledge the true cost of his trade wars and his destabilizing rhetoric have only added to the economic uncertainty facing the US in 2025. The future looks increasingly precarious as his policies continue to play out, and it remains to be seen how much longer the country can endure the economic fallout.
