President Trump’s agenda is going to collide with the highly anticipated quarterly economic projection from the Federal Reserve board, which is set to be released on Wednesday afternoon.
The Federal Reserve Chair, Jerome Powell, has been mum on Trump’s tariff threats and other broad policies, despite the fact that they are having an outsized impact on economic forecasts this year. This necessitates some transparency from central bank officials on their expectations regarding the impact of new tariffs on inflation, the labor market, and interest rates.
And there are a lot of other analysts who are predicting conflict.
Research at megabanks such as JPMorgan Chase and Goldman Sachs has reduced its forecasts for GDP growth this year, despite the fact that the underlying economy is healthy.
The worst-case scenario, where inflation accelerates despite slowing GDP, is something the Federal Reserve is ill-equipped to handle with its blunt instrument of interest rate adjustments; this risk has been exacerbated by Trump’s trade battles. Rate cuts this year are still expected by investors, but many believe they will be prompted by a deteriorating economy rather than any success in combating inflation.
This might lead to a fresh feud between Trump and Powell, as Trump frequently expressed his displeasure with Powell on Twitter when he was in his first term for failing to reduce interest rates.
The ramifications of Trump’s trade policies and other policy moves are already impacting the economy, and it will be hard for Powell to avoid them, according to Krishna Guha, vice chair at Evercore ISI, an advising business for investment banks.
In the face of nervous financial markets and falling consumer confidence due to the unknown impact of Trump’s tariff proposals, the central bank is anticipated to keep interest rates unchanged when policymakers convene on Wednesday.
The Federal Reserve would be required to reduce interest rates if increased tariffs on key U.S. trading partners were to dampen economic activity. But they will increase expenses, which means consumer prices will be pressured higher. As a result, the Federal Reserve may decide to maintain current interest rates or, worse, start raising them again.
Other actions by the government might have an impact on the forecast as well; for example, tax cuts and deregulation could stimulate growth, while deportations could reduce the supply of workers and increase prices. The task of the central bank is already complicated, and Elon Musk’s Department of Government Efficiency is aiming to drastically reduce federal bureaucracy, which might have repercussions in the private sector and even start to increase unemployment.
Trump has said that tariffs may cause “a period of transition” for the economy.
He stated earlier this month on Fox Business, “What we’re doing is very big.” And he meant it. We are returning riches to the United States. There will inevitably be times when it requires some time because it is a major undertaking. I believe it will be beneficial for us, although it does take some time.
If a recession hits the United States as a result of Trump’s plans, Commerce Secretary Howard Lutnick told CBS News last week that it will be “worth it.” (This occurred just a few days following his proclamation that “there’s going to be no recession in America”).
The sole explanation for the possibility of a recession, according to Lutnick, who spoke to CBS, is the “Biden nonsense” that we were forced to endure. Revenues are generated by Trump’s policies. They cause expansion. Factories are being constructed in this area.
But it’s still pure speculation as to how the economy will ultimately be affected by all of this.
According to Deutsche Bank’s senior U.S. economist Matthew Luzzetti, “uncertainty is heightened, and that does seem to be having some negative effects,” although it has not yet been shown in real economic statistics.
According to Luzzetti, authorities’ lack of confidence in their estimates may be further demonstrated by Powell, given the vast range of possible outcomes caused by the different amounts of tariffs.
Powell stated in his last remarks before the Federal Reserve’s pre-meeting blackout (officials do not discuss monetary policy prior to a rate decision) that the central bank will be keeping an eye out for “a series” of trade-related policy changes that could cause prices to rise more persistently. This is because such developments could lead both consumers and businesses to expect inflation to persist, which could end up becoming a self-fulfilling prophecy.
Also, even if the economy starts to suffer, Powell may feel more pressure not to cut rates because inflation has remained over the Fed’s 2% objective.
Not even including the consequences of tariffs, “inflation is coming in hotter than they anticipated,” Luzzetti added. “The message ought to convey that they are somewhat in a state of anticipation.”
