The FOMC has pinpointed tariffs as a disruptor to the ongoing economic soft landing. Here is Fed Chair Powell’s press conference.
Here is the FOMC’s Summary of Economic Projections. Since this is a committee the document presents the range of opinions.
The distribution of participants’ projections for the change in real GDP for 2025–27 and over the longer run centers on 1.6 - 1.9%. This is significantly lower than the December 2024 FOMC meeting’s consensus of 2.0 - 2.3%.
Their forecast for PCE inflation in 2025 is higher now (2.7%) than in December (2.5%).
The dot plot shows the expected decline in the fed funds rate.
It’s important to note that they don’t anticipate reducing the fed funds rate to zero (a negative real rate) which was the cocaine that juiced the asset markets. The stock market routinely front-runs the Fed by expecting a cut in the Fed funds rate that doesn’t happen – then they have a hissy fit.
Fed Projections See an Economy Dramatically Reset by Trump’s Election
Not long ago, Federal Reserve officials presumed that 2025 would simply be about getting to the soft landing
By Nick Timiraos, The Wall Street Journal, Updated March 19, 2025
…
“We now have inflation coming in from an exogenous source, but the underlying inflationary picture before that was basically 2½% inflation, 2% growth and 4% unemployment,” said Fed Chair Jerome Powell on Wednesday.
Officials projected weaker growth, higher unemployment and higher inflation than they had anticipated in December. Moreover, nearly all officials judged that if their forecasts were to be proven wrong, it would be in the direction of even softer growth, more joblessness and firmer price growth [a euphemism for higher inflation. - W].
A combination of stagnant growth and higher prices, sometimes called stagflation, could make it harder for the Fed to cut interest rates this year to pre-empt any slowdown… [end quote]
As usual, President Trump is pressuring the Fed to cut rates. Fed Chair Powell will resist. (He caved in 2019 but I don’t think he will make the same mistake again since inflation is now high which is wasn’t in 2019.)
The Fed will be slowing its roll-off of its immense book of Treasury bonds for technical reasons. (These are complicated “plumbing” reasons.) When the Fed was buying Treasury debt (Quantitative Easing) yields were suppressed. Now the Fed is doing Quantitative Tightening but will be slowing this program. Unlike the overnight fed funds rate, QT affects the long-term Treasury yields which impact mortgages and other commercial lending. Slowing QT shifts the Treasury yield curve down.
Rising inflation plus a stagnating economy = stagflation. But the FOMC will probably keep the fed funds rate steady until the impact of tariffs becomes clear, regardless of what Trump and the markets want. The Fed can’t afford to let inflation expectations become entrenched even if the economy slows. They were adamant about this from the beginning of the latest round of raising the fed funds rate.
In my opinion they should have maintained the rate at 5% since the economy has continued to grow. The tariffs are a monkey wrench thrown into a finely-tuned machine.
Wendy