Getty ImagesThe US central bank has cut its growth forecast as it warned President Donald Trump’s tariffs were “clearly” driving up prices.
The Federal Reserve released its projections for the world’s largest economy on Wednesday while keeping interest rates unchanged again, saying it wanted to see how the White House policies unfold.
That decision, which was widely expected, kept the Federal Reserve’s benchmark interest rate hovering around 4.3%, where it has stood since December.
Fed chairman Jerome Powell said that the economy still appeared healthy, despite a sharp downturn in sentiment and “remarkably high” uncertainty.
But he warned tariffs – which are taxes on imports – were likely to slow growth and hinder the bank’s efforts to keep prices stable, noting recent data showing a rise in goods prices.
“Clearly some of it, a good part of it, is coming from tariffs,” he said, speaking after the Fed’s rates announcement on Wednesday.
“Progress is probably delayed for the time being,” he added.
Since taking office in January, Trump has announced blitz of new tariffs while also calling for big cuts to taxes, regulation, and government spending.
Economists have long warned that some of those policies could cause prices to rise, at least in the short-term, and raise uncertainty for businesses.
Analysts say the concerns have also helped to drive a sell-off in the stock market, with the S&P 500 falling 10% from February back to levels last seen in September.
Trump has acknowledged there could be “a little disturbance” from his tariffs, but says the policies will lead to long-term growth.
Inflation and economic downturn fears
The dynamic has added to the challenges facing the Fed, which has spent much of the last three years trying to keep prices stable and avoid economic downturn.
Mr Powell said the bank was assuming that tariffs would cause a one-time jump in prices, rather than a more sustained increase, but it is also bracing for a hit to growth.
The forecasts showed policymakers now expect inflation to stand at 2.7% at the end of this year, up from the 2.5% they had predicted in December.
They are also expecting growth of just 1.7% this year, down from the 2.1% previously anticipated.
Though it kept interest rates unchanged on Wednesday, the forecasts suggest the bank still expects to cut rates by the end of the year.
The Fed also said it would slow down selling assets, such as government debt, in a move that effectively offers more support for the economy.
“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,” said Whitney Watson, global co-head and co-chief investment officer of fixed income and liquidity solutions at Goldman Sachs Asset Management.
Leading stock indexes in the US rose after the announcement, with the S&P 500 closing up more than 1%.
Trump, who has criticised the Fed in the past, did not immediately address the meeting.
But Kevin Hassett, director of the National Economic Council, a policy arm of the US government, dismissed concerns about the effect of the tariffs.
“Chairman Powell is clear that if there were a tariff effect, it’s a transitory one,” he said, adding that he respected the “independence of the Fed, as we all do within the White House”.
The Fed hiked borrowing costs significantly starting in 2022, aiming to cool the economy and ease the pressures pushing up prices.
Inflation, the rate of price increases, has since fallen to 2.8% as of February, but remains above the bank’s 2% target.
Recent surveys also suggest that public sentiment has sunk, while expectations for inflation have risen, which could make the bank’s job stabilising prices more difficult.
Households expecting prices to rise have incentive to buy now. But that can fuel inflation, as firms respond to the increased demand by raising prices further.
“The problem the US faces is that inflation remains a primary risk and is showing signs of consumer expectations becoming unanchored from the 2% target,” said Lindsay James, investment strategist at Quilter.
“Leading indicators of demand may be slowing in the US, but inflation persists and risks spiralling if the proposed economic policies continue.”
Mr Powell said the bank was closely watching those surveys, but had yet to see evidence in the “hard data” to cause alarm about the economy.
“We’re well-positioned to wait for further clarity and not in any hurry,” he said.
Additional reporting by Bernd Debussman Jr
