The Federal Reserve board’s widely anticipated quarterly forecast for the economy — due out Wednesday afternoon — is about to run smack into President Donald Trump’s agenda.
Fed Chair Jerome Powell has steadily avoided commenting on Trump’s tariff threats and other sweeping moves, but those policies are increasingly shaping prospects for the economy this year. That means central bank policymakers will have to at least partially show their hand on what they think new tariffs will mean for inflation, the labor market and interest rates.
And many other forecasters see trouble ahead.
Even as the underlying economy remains strong, researchers at megabanks like Goldman Sachs and JPMorgan Chase have slashed their estimates for how much GDP will grow this year.
What’s more, Trump’s trade wars have heightened the possibility that inflation could accelerate even while growth slows, a worst-case scenario that the Fed is not suited to addressing with its blunt tool of interest rate adjustments. Investors still expect rate reductions this year, but many expect those cuts to come because of a weakening economy, not progress on fighting inflation.
That means Powell’s attempts to lay low will get a lot harder, which raises the specter of a new conflict with Trump, who regularly tweeted his dissatisfaction with the Fed chief during his first term for not cutting interest rates.
“It’s going to be quite difficult for Powell to completely duck the implications of Trump trade policy and other policy actions that are clearly having an effect on the economy already,” said Krishna Guha, vice chair at investment bank advisory firm Evercore ISI.
The central bank is expected to hold interest rates steady when policymakers meet on Wednesday, maintaining the status quo against a backdrop of anxious financial markets and sinking consumer confidence as Trump’s unpredictable tariff policies play out.
Higher duties on major U.S. trading partners are likely to slow economic activity, which would call for the Fed to lower interest rates. But they will also push up costs, fueling upward pressure on consumer prices. That could prompt the Fed to keep rates where they are — or, at worst, even begin to raise them again.
Other administration moves could also affect the outlook — deregulation and tax cuts could boost growth, while deportations could shrink the pool of available labor, driving up costs. Meanwhile, Elon Musk’s Department of Government Efficiency is pursuing deep cuts to the federal bureaucracy that could ripple out to parts of the private sector and begin to push up unemployment, further complicating the central bank’s job.
For his part, Trump said the economy might go through “a period of transition” as tariffs go into place.
“What we’re doing is very big,” he said on Fox Business earlier this month. “We’re bringing wealth back to America. That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”
Commerce Secretary Howard Lutnick told CBS News last week that if the U.S. enters a recession because of Trump’s policies, it will be “worth it.” (That was days after he declared that “there’s going to be no recession in America”).
“The only reason there could possibly be a recession is because the Biden nonsense that we had to live with,” Lutnick told CBS. Trump’s “policies produce revenues. They produce growth. They produce factories being built here.”
Still, the net effect of all of this on the economy is just guesswork.
“Uncertainty is heightened, and that does seem to be having some negative effects, but so far they have not seen that spill over into real economic data,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Luzzetti said the wide range of outcomes might mean that Powell simply underscores officials’ lack of confidence behind their projections, since the varying sizes of potential tariffs could lead to wildly disparate outcomes.
In his final remarks before the Fed’s pre-meeting blackout — officials don’t comment on monetary policy before a rate decision — Powell said the central bank will be watching whether there are “a series” of trade-related policy changes that could lead to more persistently rising prices, particularly as that might make consumers and businesses expect inflation to continue, which can be a self-fulfilling prophecy.
On top of that, inflation has still been hovering above the Fed’s 2 percent target, which might add to pressure on Powell to not lower rates, even if the economy begins to weaken.
“Inflation is coming in hotter than they anticipated even before tariff-driven effects,” Luzzetti said. “The messaging should be one where they are kind of in a wait-and-see mode.”
