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With overall sentiment sliding due to policy "turmoil," prices are projected to rise faster than expected at least in part and perhaps largely because of Trump's plans to levy duties on imports
Published : 20 Mar 2025, 10:18 AM
The Trump administration's initial policies, including extensive import tariffs, appear to have tilted the US economy toward slower growth and at least temporarily higher inflation, Federal Reserve Chair Jerome Powell said on Wednesday, with central bank policymakers left guessing over what lies ahead during a period of "unusually elevated" uncertainty.
With overall sentiment sliding due to policy "turmoil," prices are projected to rise faster than expected at least in part and perhaps largely because of President Donald Trump's plans to levy duties on imports from US trading partners, Powell said after the Fed announced it had held its benchmark overnight rate steady in the 4.25%-4.50% range.
While Fed policymakers still expect the central bank to deliver two quarter-percentage-point rate cuts by the end of this year, matching their projection in December, that's largely due to weakened economic growth offsetting higher inflation, and what Powell called the "inertia" of not knowing what else to do given the muddled outlook.
There is "just really high uncertainty. What would you write down?" when making projections, Powell said in a news conference after the end of the Fed's latest two-day policy meeting. "I mean it's just ... really hard to know how this is going to work out."
"We understand that sentiment is quite negative at this time, and that probably has to do with turmoil at the beginning of an administration that's making big changes," Powell said.
Overall economic data remains solid, the Fed chief said, pointing to the current unemployment rate of 4.1% and a sense that the job market remains roughly in balance.
Trump posted late on Wednesday 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. Do the right thing."
Powell's remarks and the Fed's latest set of policymaker projections was heavily influenced by what has transpired since Trump took office on Jan 20 with a vow to impose the import tariffs.
Data released along with the latest policy and economic projections showed Fed officials in near unanimity that the outlook was less certain than usual, and that risks considered balanced as of the Fed's Jan 28-29 meeting were now tilted towards slower growth, higher joblessness, and higher inflation.
If the Fed's median outlook for the next three years comes to pass, it would be the weakest three-year run of economic growth since at least former President Barack Obama's first term in the White House and the slow recovery from the 2007-2009 recession.
"We now have inflation coming from an exogenous source," said Powell, using a term economists employ to describe an outside shock, in this case tariffs that could, if Trump follows through with all his plans, lift the average tax rate on imports to levels not seen since the Great Depression.
Some of those levies have already been imposed, with the bulk due in early April in the form of steep 25% taxes on most goods from Mexico and Canada, and a sweeping set of tariffs meant to match whatever other countries impose on their imported goods from the US
Powell said the Fed will be watching intently in coming months to determine how much of all those actions passes through to consumer prices, whether those levies or other countries' retaliatory responses seem to be causing more persistent price pressures, and perhaps most importantly whether it all starts to feed into inflationary psychology among families and businesses.
Though some measures of inflation expectations have moved higher in the early weeks of the Trump administration, the longer-run measures that the Fed regards as most important to achieving its policy goals "haven't moved much," Powell told reporters.
The Fed will also be watching to see if weaker growth feeds into higher unemployment, and Powell reiterated that it was ready to act in either case, with policy kept tighter if inflation proves more persistent, or relaxed if unemployment starts to rise.
So far, Powell said, the Fed's two goals are not in conflict, giving it some leeway in coming rate decisions.
STILL NO RUSH TO JUDGMENT
The Fed cut its benchmark interest rate by a full percentage point last year, but has kept rates on hold this year as it waits for further evidence that inflation will continue to fall, and, more recently, for more clarity about the impact of Trump's policies.
"We're not going to be in any hurry to move," Powell said. "Our current policy stance is well-positioned to deal with the risks and uncertainties we face ... The right thing to do is to wait here for greater clarity about what the economy is doing."
Fed officials now see their preferred measure of inflation ending the year at 2.7%, versus the 2.5% pace anticipated in December. Their target is 2%, and Fed officials so far view the tariffs as only a temporary blow to reaching it in 2027.
"There may be a delay in further progress over the course of this year," Powell said.
Fed officials also marked down their outlook for economic growth for this year to 1.7% from the previous 2.1%, with slightly higher unemployment projected by the end of this year.
Major US stock indices extended their gains slightly after the release of the Fed's policy statement and projections, closing sharply higher. The dollar pared some of its earlier gains and US Treasury yields eased.
Traders of US interest rate futures saw just over a 62% chance of the Fed resuming its rate cuts at its meeting in June, according to LSEG estimates, compared with 57% before the release of the policy statement and projections.
"The Fed is as lost in the wilderness as the rest of us trying to decipher the continual shifts in economic policy from 1600 Pennsylvania Avenue," said Omair Sharif, president of Inflation Insights, referring to the street address of the White House. "Beyond the cut to median growth this year and the boost to median inflation, the most telling aspect of the (projections) is the shift higher in uncertainty."
The Fed also announced on Wednesday that it will slow the ongoing drawdown of its $6.81 trillion balance sheet, a process known as quantitative tightening.
Fed Governor Chris Waller was the lone dissenter from the latest policy statement because of the change in balance sheet policy.
