The US central bank cautioned that President Donald Trump’s tariffs were “clearly” driving up prices, therefore it lowered its growth prediction.
With interest rates remaining steady, the Federal Reserve announced its forecasts for the largest economy in the world on Wednesday, stating that it wanted to see how the White House’s policies developed.
The largely anticipated decision maintained the benchmark interest rate set by the Federal Reserve at 4.3%, where it has been since December.
Trump, who has frequently attacked the central bank, urged it to lower interest rates following the news.The US President stated on his platform Truth Social that “the Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy.”
“Take the proper action. America celebrates Liberation Day on April 2nd.
Earlier, Fed chairman Jerome Powell stated that despite a steep decline in confidence and “remarkably high” uncertainty, the economy still seemed to be doing well.
However, pointing to recent statistics indicating an increase in the cost of products, he cautioned that tariffs, which are levies on imports, were likely to delay development and impede the bank’s attempts to maintain price stability.
Following the Fed’s rate announcement on Wednesday, he stated, “Clearly some of it, a good part of it, is coming from tariffs.””Progress is probably delayed for the time being,” he stated.
Trump has called for significant cutbacks to taxes, regulations, and government spending since becoming office in January, and he has announced a flurry of new tariffs.
For a long time, economists have cautioned that some of those measures may increase prices, at least temporarily, and create uncertainty for companies.
According to analysts, the worries have also contributed to a sell-off in the stock market, as the S&P 500 has dropped 10% since February to levels last observed in September.Trump claims his tariffs will result in long-term prosperity, but he has admitted that there may be “a little disturbance” from them.
Fears about inflation and the economic slump
The Fed has spent most of the previous three years attempting to maintain price stability and prevent an economic slump, and this dynamic has made matters more difficult.
According to Mr. Powell, the bank is anticipating a damage to GDP but is also assuming that tariffs would result in a one-time price spike rather than a more gradual rise.According to the projections, authorities have raised their inflation prediction from 2.5% in December to 2.7% by the end of this year.
Additionally, they forecast growth of only 1.7% this year, as opposed to the 2.1% they had previously projected.
Despite holding interest rates steady on Wednesday, the bank is still expected to lower rates by the end of the year, according to the estimates.
In a measure that essentially provides extra assistance for the economy, the Fed also announced that it will cut down the sale of assets, including government debt.
“For the time being, the Fed is in wait and see mode, as it monitors whether the recent growth slowdown develops into something more serious,”stated Whitney Watson, Goldman Sachs Asset Management’s global co-head and co-chief investment officer for fixed income and liquidity solutions.
Following the news, major US stock indices increased, with the S&P 500 closing up more than 1%.
The director of the US government’s policy arm, the National Economic Council, Kevin Hassett, downplayed worries about the impact of the tariffs.
He said that he appreciated the “independence of the Fed, as we all do within the White House” and that “Chairman Powell is clear that if there were a tariff effect, it’s a transitory one.”In an effort to calm the economy and lessen the pressures driving up prices, the Fed raised borrowing costs dramatically beginning in 2022.
Although the pace of price rises, or inflation, has now decreased to 2.8% as of February, it is still more than the bank’s aim of 2%.
Additionally, recent polls indicate that public mood has declined as inflation expectations have increased, which may make it more challenging for the bank to stabilize prices.
Families that anticipate price increases have an incentive to purchase now. However, when businesses raise prices in response to the increasing demand, it might contribute to inflation.
According to Lindsay James, investment strategist at Quilter, “the issue facing the US is that inflation is still a major risk and is exhibiting indications of consumer expectations becoming unanchored from the 2% target.”In an effort to calm the economy and lessen the pressures driving up prices, the Fed raised borrowing costs dramatically beginning in 2022.
Although the pace of price rises, or inflation, has now decreased to 2.8% as of February, it is still more than the bank’s aim of 2%.
Additionally, recent polls indicate that public mood has declined as inflation expectations have increased, which may make it more challenging for the bank to stabilize prices.
Families that anticipate price increases have an incentive to purchase now. However, when businesses raise prices in response to the increasing demand, it might contribute to inflation.
According to Lindsay James, investment strategist at Quilter, “the issue facing the US is that inflation is still a major risk and is exhibiting indications of consumer expectations becoming unanchored from the 2% target.”