This week, new economic projections from Federal Reserve officials will provide the clearest indication yet of how U.S. central bankers assess the economic implications of the Trump administration’s policies. These policies have introduced uncertainty into what was previously a stable economic outlook.
Top economists have revised their expectations for U.S. economic growth downward, increased the perceived risk of a recession, and projected higher inflation. The reason? President Donald Trump’s aggressive tariff policies, which have disrupted global trade. With broader tariffs expected to take effect soon, economic forecasters are bracing for further turbulence.
A Shift from Stability to Uncertainty
Previously, many policymakers viewed the U.S. economy as being in a “sweet spot,” with stable growth and balanced risks. However, recent developments have heightened economic uncertainty, triggering stock market volatility and dampening forecasts.
“A ‘soft landing’ is still likely, with the economy continuing to grow and inflation gradually declining to the Fed’s 2% target,” said Beth Ann Bovino, chief economist at U.S. Bank. “However, multiple shocks are emerging. Trade wars, consumer expectations indicating fears of recession, and inflationary pressures are all contributing to the current uncertainty.”
Market Reactions and Interest Rate Policy
The recent turmoil in financial markets underscores these concerns. The S&P 500 briefly entered a technical correction last week, dropping 10% from its record high in February. While the Federal Reserve does not typically base monetary policy on short-term market fluctuations, sharp movements can indicate broader economic shifts, including declining consumer confidence and reduced household spending.
At its upcoming policy meeting, the Fed is expected to hold its benchmark interest rate steady in the 4.25%-4.50% range. Since December, the median projection among policymakers had anticipated two quarter-point interest rate cuts in 2025, though investors currently expect three reductions.
Updated Economic Projections
In December, Federal Reserve officials projected U.S. economic growth at 2.1% for the year, with unemployment slightly rising to 4.3% by year-end. Inflation, as measured by the Personal Consumption Expenditures Price Index, was expected to settle at 2.5%.
However, these projections predate the Trump administration’s latest trade measures. The new tariffs include a doubling of duties on Chinese goods, a 25% tax on imported steel and aluminum, and a similar levy on most imports from Mexico and Canada, set to take effect next month. Global retaliatory tariffs could further escalate trade tensions.
Some analysts compare these policies to the tariff increases of the 1930s, which exacerbated the Great Depression. Even members of Trump’s administration acknowledge that adjustments could be painful.
The Fed’s Dilemma: Growth vs. Inflation
When the Federal Reserve releases its updated projections and policy statement, three potential scenarios will be in focus:
- A slowing economy or easing inflation, which could justify rate cuts.
- Persistent inflation above the Fed’s 2% target, potentially forcing monetary tightening.
- A combination of both high inflation and slowing growth, creating a policy dilemma.
A recent Deutsche Bank analysis highlighted the challenges facing Fed officials. One major difficulty is distinguishing temporary tariff-induced price increases from more lasting inflationary effects. Another issue is determining whether a rise in unemployment represents a mild slowdown or the start of a deeper recessionary cycle.
Inflation expectations, while anchored for now, are showing increased uncertainty. Deutsche Bank’s chief U.S. economist, Matthew Luzzetti, and his team noted that the economy could follow one of two paths: either resilient growth with sticky inflation, keeping the Fed on hold, or a downturn exacerbated by trade disruptions and government employment cuts, necessitating aggressive rate cuts.
While the baseline forecast still leans toward steady growth and persistent inflation, rising recession risks have made the outlook increasingly complex. The Federal Reserve’s response in the coming months will be critical in shaping economic conditions moving forward.