Trump Administration’s Economic Impact

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The Trump administration’s initial policies, including extensive import tariffs, appear to have tilted the U.S. economy toward slower growth and at least temporarily higher inflation, Federal Reserve Chair Jerome Powell said on Wednesday, drawing the ire of President Donald Trump.

Trump posted late on Wednesday on his Truth Social platform: “The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy. Do the right thing.”

Earlier, in explaining why rates were being kept unchanged, Powell described the uncertainty faced by Fed policymakers as “unusually elevated.”

With overall sentiment sliding due to policy “turmoil,” prices are projected to rise faster than previously expected at least in part, and perhaps largely, because of Trump’s plans to impose duties on imports from U.S. trading partners. Powell said this after the Fed announced it had held its benchmark overnight rate steady in the 4.25%-4.50% range.

While Fed policymakers still expect the central bank to deliver two quarter-percentage-point rate cuts by the end of this year, matching their projection in December, this is largely due to weakened economic growth offsetting higher inflation, and what Powell termed the “inertia” of not knowing what else to do given the muddled outlook.

Powell noted, “There is just really high uncertainty. What would you write down?” making projections particularly challenging. “I mean it’s just… really hard to know how this is going to work out.”

“We understand that sentiment is quite negative at this time, and that probably has to do with turmoil at the beginning of an administration that’s making big changes,” Powell said.

Overall economic data remains solid, the Fed chief noted, pointing to the current unemployment rate of 4.1% and a sense of balance in the job market.

Powell’s remarks and the Fed’s latest set of policymaker projections were heavily influenced by events since Trump took office on January 20 with a vow to impose import tariffs.

Data released along with the latest policy and economic projections showed Fed officials in near unanimity that the outlook was less certain than usual, and risks that were previously balanced were now tilted towards slower growth, higher joblessness, and higher inflation.

If the Fed’s median outlook for the next three years materializes, it would represent the weakest three-year economic growth since at least former President Barack Obama’s first term, following the 2007-2009 recession.

“We now have inflation coming from an exogenous source,” Powell said, referring to external shocks like tariffs that could elevate the average import tax rate to levels not seen since the Great Depression.

Some tariffs have already been imposed, with the bulk set to begin in early April, including steep 25% taxes on most goods from Mexico and Canada, alongside a broad set of tariffs designed to counteract foreign duties on U.S. imports.

Powell stated the Fed would closely monitor how these measures influence consumer prices, whether retaliatory responses from other countries create lasting price pressures, and if all of this affects inflationary expectations among families and businesses.

Although some inflation expectation measures have increased early in the Trump administration, long-term measures crucial to achieving its policy goals “haven’t moved much,” Powell informed reporters.

The Fed will also observe whether weaker growth leads to higher unemployment. Powell reiterated that the bank is prepared to act accordingly: tightening policies if inflation persists or easing if joblessness rises.

Currently, Powell mentioned, the Fed’s goals are not conflicting, allowing for flexibility in upcoming rate decisions.

STILL NO RUSH TO JUDGMENT

The Fed cut its benchmark interest rate by a full percentage point last year, but has maintained rates this year, seeking further evidence of falling inflation and greater clarity on the impact of Trump’s policies.

“We’re not going to be in any hurry to move,” Powell reiterated. “Our current policy stance is well-positioned to deal with the risks and uncertainties we face… The right thing to do is to wait here for greater clarity about what the economy is doing.”

Fed officials currently predict their preferred inflation measure will end the year at 2.7%, up from the 2.5% projected in December. Their target remains 2%, and Fed officials thus far view tariffs as only a temporary setback to achieving this in 2027.

Powell noted, “There may be a delay in further progress over the course of this year.”

Officials have also revised down their growth outlook for this year to 1.7% from the previous 2.1%, with expectations of slightly higher unemployment by the year’s end.

Major U.S. stock indices rose slightly after the Fed’s policy statement and projections, closing sharply higher. The dollar decreased some of its earlier gains, and U.S. Treasury yields softened.

Traders in U.S. interest rate futures saw just over a 62% chance of the Fed resuming rate cuts in June, up from 57% before the release of the policy statement and projections.

“The Fed is as lost in the wilderness as the rest of us trying to decipher the continual shifts in economic policy from 1600 Pennsylvania Avenue,” remarked Omair Sharif, president of Inflation Insights, referencing the White House’s address. “Beyond the cut to median growth this year and the boost to median inflation, the most telling aspect of the projections is the shift higher in uncertainty.”

The Fed also announced it would slow the ongoing drawdown of its $6.81 trillion balance sheet, known as quantitative tightening. Fed Governor Chris Waller was the only dissenting voice on the latest policy statement due to this change in balance sheet policy.