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The Federal Reserve has slashed its US growth forecast and lifted its inflation outlook, underscoring concerns that Donald Trump’s tariffs will knock the world’s biggest economy.
The Fed’s latest set of projections showed officials now expect GDP to expand by 1.7 per cent this year, with prices forecast to rise by 2.7 per cent. Policymakers kept the central bank’s main interest rate on hold at the end of a two-day meeting on Wednesday.
Fed chair Jay Powell acknowledged to reporters after the meeting that the US president’s plan to hit trading partners with sweeping tariffs had affected the central bank’s outlook for inflation and the economy.
“Clearly some of it, a good part of it,” is related to the impact of Trump’s tariffs, Powell said, adding that they “tend to bring growth down and push inflation up”. He also said that the Fed did “not need to be in a hurry” to shift rates given “unusually elevated” uncertainty.
Progress on inflation was “probably delayed for the time being”, Powell said. The Fed has been battling to push inflation back to its 2 per cent goal and halt the most severe bout of price pressures in decades.
The Fed also announced that it was slowing down the pace of its quantitative tightening programme, lowering the amount of US Treasury debt it allows to roll off its balance sheet each month from $25bn to $5bn beginning in April.
US equities hit their highs of the day following the Fed decision, with the S&P 500 up 1.2 per cent and the tech-heavy Nasdaq Composite gaining 1.5 per cent.
US government debt also rallied, pushing the benchmark 10-year Treasury yield down 0.04 percentage points to 4.26 per cent.
Ed Al-Hussainy at Columbia Threadneedle Investments said: “The good news for risk is that the Fed expects higher inflation but not high enough to change their pace of rate cuts.”
The new projections mark a significant shift from December, when officials on the Federal Open Market Committee, the central bank’s policy-setting panel, forecast 2.1 per cent growth for 2025 and estimated the closely watched personal consumption expenditures inflation gauge would end the year at 2.5 per cent.
The meeting came at a crucial time for the US economy as Trump has pledged deep reductions to federal spending, sweeping tax cuts. He has also imposed steep new tariffs on imports from foreign countries, sparking a global trade war.
Surveys have shown US consumers and businesses are fretting over the levies, which have depressed demand and increased price pressures.
The Fed’s new forecasts “signalled essentially that we are in a stagflation economy, with lower growth and higher inflation”, said Torsten Slok, chief economist at investment firm Apollo.
“On the one hand, stagflation is a very complex challenge for the Fed — should they listen to growth, meaning they should cut rates, or should they listen to higher inflation, meaning they should be hiking rates?”
An FOMC statement on Wednesday, made after US rate-setters maintained the target range for the benchmark federal funds rate between 4.25 per cent and 4.5 per cent, said: “Uncertainty around the economic outlook has increased.”
The latest so-called dot plot projections show Fed officials broadly expect a further one or two quarter-point rate cuts this year — the same as in December — after lowering rates by 1 percentage point in 2024. However, four FOMC members now expect no cuts at all this year, against one in December.
Investors are expecting between two and three quarter-point cuts by the end of 2025.
Fed governor Christopher Waller voted against the decision to slow quantitative tightening, saying the current decline of $25bn a month remained appropriate.
All of the voting FOMC members backed the decision to keep rates on hold.
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