The Federal Reserve (Fed) has lowered its forecast for U.S. economic growth and warned that President Donald Trump's tariff policies have "noticeably" pushed up prices. The Fed stated it wants to observe the subsequent developments of the White House's policies and therefore, once again, held interest rates steady.
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03-20, 2025This decision, which was widely anticipated by the market, keeps the Fed's benchmark interest rate at around 4.3%, a level that has remained unchanged since last December. Federal Reserve Chairman Jerome Powell said that despite a sharp decline in market sentiment and "unusually high" uncertainty, the U.S. economy remains generally healthy.
However, Powell cautioned that tariffs – taxes on imported goods – could slow economic growth and hinder the Fed's efforts to stabilize prices. He pointed out that recent data shows that commodity prices have risen. "It's clear that a portion of that, a significant portion of that, is coming from tariffs," he said after the Fed announced its interest rate decision. "At the moment, (economic) progress may be delayed."
Since taking office, the Trump administration has announced a series of new tariff measures while calling for significant tax cuts, deregulation, and reduced government spending. Economists have long warned that some of these policies could lead to higher prices, at least in the short term, and increase uncertainty for businesses. Analysts believe these concerns have also exacerbated the stock market sell-off, with the S&P 500 index falling 10% since February, returning to its level last September.
Trump acknowledged that his tariff policies may bring "some disruption," but he stated that these policies will lead to long-term growth. This dynamic adds to the challenges faced by the Fed, which has been working to maintain price stability and avoid a recession for the past three years. Powell said the Fed believes tariffs will only cause a one-time increase in prices, rather than a sustained rise, but is also preparing for the potential impact on economic growth.
The Fed's forecasts show that policymakers now expect inflation to be 2.7% by the end of this year, higher than the 2.5% forecast in December. They also expect economic growth this year to be only 1.7%, lower than the previously forecast 2.1%. Although the Fed held interest rates steady on Wednesday, the forecasts suggest that the Fed still expects to cut interest rates before the end of this year. The Fed also said it would slow the sale of assets, including government bonds, a move that effectively provides more support to the economy.
Whitney Watson, Co-Head and Co-Chief Investment Officer of Global Fixed Income and Liquidity Solutions at Goldman Sachs Asset Management, said: "Right now, the Fed is in a wait-and-see mode, and it is monitoring whether the recent slowdown in economic growth will develop into a more serious problem." After the Fed announced its interest rate decision, major U.S. stock indexes rose, with the S&P 500 index closing up more than 1%.
Trump has criticized the Fed in the past, but he did not immediately comment on this meeting. However, Kevin Hassett, Director of the National Economic Council, the U.S. government's policy arm, dismissed concerns about the impact of tariffs. "Chairman Powell made it clear that even if there are tariff impacts, they are temporary," he said, adding that he respects "the independence of the Fed, and all of us in the White House respect that."
The Fed began sharply raising borrowing costs in 2022, aiming to cool the economy and ease upward pressure on prices. As of February, inflation (the rate at which prices rise) had fallen to 2.8%, but remained above the Fed's 2% target. Recent surveys have also indicated a decline in public sentiment and an increase in inflation expectations, which could make the Fed's job of stabilizing prices more difficult.
Households expecting prices to rise have an incentive to buy goods now. But this exacerbates inflation, as businesses respond to increased demand by further raising prices. "The problem for the U.S. is that inflation remains the primary risk, and there are signs that consumer expectations are becoming unanchored from the 2% target," said Lindsay James, investment strategist at Quilter. "Leading indicators of U.S. demand may be slowing, but inflation is persistent, and there is a risk of a spiral if proposed economic policies continue."
Powell said the Fed is closely monitoring these surveys but has not yet seen evidence in the "hard data" to cause concern about the economy. "We are well prepared to wait for further clarity and are in no rush to take action," he said.
