The US Federal Reserve has lowered its growth forecast, citing concerns that President Donald Trump’s tariffs are “clearly” driving up prices.
In its latest projections, released on Wednesday, the Fed left interest rates unchanged, holding the benchmark rate around 4.3%, where it has remained since December. The central bank indicated that it wanted to observe the long-term effects of the White House’s economic policies before making further changes.
Federal Reserve Chairman Jerome Powell said the economy still appears healthy, despite rising uncertainty and a noticeable downturn in economic sentiment. However, he warned that tariffs—taxes on imports—are likely to slow growth and complicate the Fed’s efforts to stabilize prices. Powell pointed to recent data showing an increase in the price of goods, attributing a large part of it to tariffs.
“Clearly, some of it, a good part of it, is coming from tariffs,” Powell remarked during a press conference following the Fed’s rate announcement. “Progress is probably delayed for the time being.”
Since taking office, President Trump has introduced a wave of new tariffs, along with sweeping cuts to taxes, regulations, and government spending. Economists have raised concerns that such policies could lead to price increases and heightened uncertainty for businesses. The stock market has also felt the impact, with the S&P 500 falling 10% since February, bringing it back to levels not seen since September.
Trump has acknowledged the potential for “a little disturbance” caused by his tariffs, but he remains confident that these policies will ultimately lead to long-term growth.
Inflation and Economic Fears
The Fed has been facing challenges as it tries to keep prices stable and avoid an economic downturn. Powell said the Fed is assuming that tariffs will cause a one-time price spike rather than a prolonged increase, but the bank is preparing for a possible slowdown in growth.
According to the Fed’s latest forecasts, inflation is expected to rise to 2.7% by the end of the year, up from the previous estimate of 2.5%. Meanwhile, growth is projected to slow to 1.7%, down from the earlier forecast of 2.1%.
Although the Fed kept interest rates unchanged this week, it suggested that a rate cut might be implemented by the end of the year. Additionally, the Fed plans to slow down the selling of assets like government debt to provide further support for the economy.
“For now, the Fed is in a wait-and-see mode as it monitors whether the recent slowdown turns into something more serious,” said Whitney Watson, co-chief investment officer at Goldman Sachs Asset Management.
Following the Fed’s announcement, US stock markets saw a boost, with the S&P 500 closing up by more than 1%.
Trump Administration’s Response
President Trump, who has previously criticized the Fed, did not immediately comment on the meeting. However, Kevin Hassett, the director of the National Economic Council, downplayed concerns about the tariffs’ impact.
“Chairman Powell is clear that if there were a tariff effect, it’s a transitory one,” Hassett said, emphasizing the White House’s respect for the Fed’s independence.
The Fed has raised borrowing costs since 2022 in an attempt to cool the economy and ease inflationary pressures. Inflation has since fallen to 2.8% as of February but remains above the central bank’s 2% target.
Recent surveys suggest that consumer confidence has dipped, while inflation expectations have risen. Powell acknowledged that such expectations can complicate the Fed’s efforts to stabilize prices. When households expect prices to rise, they tend to buy now, driving demand and leading firms to raise prices further, which fuels inflation.
“The problem the US faces is that inflation remains a primary risk, with signs that consumer expectations are drifting away from the Fed’s 2% target,” said Lindsay James, an investment strategist at Quilter.
Despite these concerns, Powell stated that the Fed is still awaiting more conclusive data before making any major decisions. “We’re well-positioned to wait for further clarity and not in any hurry,” he said.
