Fed Warns: Tariffs Slow U.S. Economy
Fed Holds Off on Changes, Maintains Outlook for Two Rate Cuts in 2025 — For Now
The Federal Reserve kept interest rates steady on Wednesday and reaffirmed its forecast for two rate cuts in 2025, despite growing economic uncertainty fueled by President Donald Trump’s new tariffs.
“Uncertainty today is unusually elevated,” Fed Chair Jerome Powell said at his press conference. “We need to see how things actually play out.”
While the Fed’s official projection still shows two cuts next year, Powell emphasized that policymakers are in no rush to move until they have a clearer picture of how the economy responds. He noted the economy remains stable enough to allow for patience.
“We are well-positioned to wait for greater clarity,” he said.
Markets welcomed the Fed’s cautious approach, with the Dow Jones Industrial Average climbing 0.92% and the S&P 500 up 1.08%.
Still, signs of division within the Fed are emerging. Eight officials now expect only one or zero cuts this year — double the number from December — hinting at a more hawkish tone.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said markets had been bracing for exactly that shift due to persistent inflation concerns. But others pointed out Powell’s calm demeanor. “He seemed very relaxed about inflation,” said Padhraic Garvey, ING’s head of research for the Americas.
At the same time, the Fed lowered its 2025 GDP growth forecast from 2.1% to 1.7% and predicted inflation would rise to 2.7% by year-end — well above its 2% target. Powell attributed part of the rise to tariffs but suggested it might be temporary, with inflation expected to ease to 2.2% in 2026.
The Fed’s mixed messaging left some economists puzzled. “Uncertainty is high, inflation is climbing, officials are split on rate moves, but they still forecast two cuts. That seems wildly unlikely,” economist Robert Frick commented on social media.
Luzzetti noted that any cuts this year would likely be reactionary — what he called “bad-news cuts” — in response to slowing growth.
In a separate move, the Fed announced it will slow its balance sheet runoff, allowing just $5 billion in Treasurys to mature without replacement each month, down from $25 billion, while continuing to let $35 billion in mortgage-backed securities roll off.
In a rare dissent, Fed Governor Christopher Waller voted against the decision, preferring no change to the runoff pace.
The economy has clearly cooled since the start of the year, with uncertainty around trade and immigration policies adding pressure. Meanwhile, inflation remains stubbornly above target, complicating the Fed’s ability to respond proactively.
With the White House set to announce new tariffs on April 2, economists warn the Fed could soon face even more challenging conditions.
“I think by the time Powell holds his next press conference in May, the data will look quite a bit uglier,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
