The Federal Reserve Board's highly anticipated quarterly economic forecast, set to be released Wednesday afternoon, is on a collision course with President Donald Trump's agenda.
While Fed Chair Jerome Powell has largely refrained from commenting on Trump's tariff threats and other significant policy moves, these actions are increasingly influencing the economic outlook for the year. As a result, central bank policymakers will need to provide some insight into how they believe the new tariffs could impact inflation, the labor market, and interest rates.
Despite a generally strong underlying economy, major banks like Goldman Sachs and JPMorgan Chase have lowered their projections for GDP growth this year.
Adding to the uncertainty, Trump's trade wars have increased the risk of a troubling scenario: rising inflation alongside slowing growth. This "stagflation" risk is challenging for the Fed to address effectively with its primary tool—adjusting interest rates.
While investors still anticipate rate cuts this year, they largely expect them to respond to a weakening economy rather than as a strategy to control inflation. As a result, Powell's efforts to stay out of the political spotlight may become more difficult, potentially leading to renewed clashes with Trump, who previously criticized the Fed chief for not reducing interest rates quickly enough.
Krishna Guha, vice chair at investment bank advisory firm Evercore ISI, noted, “It will be challenging for Powell to fully avoid the impact of Trump’s trade policies and other measures that are already influencing the economy.”
When Federal Reserve policymakers meet on Wednesday, they are expected to keep interest rates unchanged, maintaining stability amid uncertain financial markets and declining consumer confidence as Trump’s unpredictable tariff strategies unfold.
Higher tariffs on key U.S. trading partners could slow economic growth, potentially leading the Fed to reduce interest rates. However, these tariffs may also increase costs, driving up consumer prices. This inflationary pressure might force the Fed to maintain its current rate or, in a more drastic scenario, consider raising rates again.
Other government actions could also shape the economic outlook — while deregulation and tax cuts may stimulate growth, deportations could reduce the labor pool, leading to higher costs. At the same time, Elon Musk’s Department of Government Efficiency is implementing significant reductions in the federal workforce, which could extend to the private sector, potentially raising unemployment and complicating the Federal Reserve's efforts to stabilize the economy.
Trump acknowledged that the economy could experience “a period of transition” as tariffs take effect.
“What we’re doing is very big,” he said on Fox Business earlier this month. “We’re bringing wealth back to America. That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”
Commerce Secretary Howard Lutnick told CBS News last week that even if Trump's policies lead to a recession, it would be “worth it.” This statement came just days after he confidently asserted, “there’s going to be no recession in America.”
“The only reason there could possibly be a recession is because of the Biden nonsense that we had to live with,” Lutnick stated. “Trump’s policies generate revenue, drive growth, and result in factories being built here.”
However, the overall economic impact of these policies remains uncertain.
“Uncertainty is heightened, and that does seem to be having some negative effects, but so far they have not seen that spill over into real economic data,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
Luzzetti noted that the wide range of possible outcomes could lead Federal Reserve Chair Jerome Powell to emphasize the uncertainty surrounding their projections. The varying scale of potential tariffs could result in vastly different economic scenarios.
Before the Fed’s pre-meeting blackout—during which officials refrain from commenting on monetary policy—Powell stated that the central bank is closely monitoring whether a series of trade-related policy changes might lead to sustained price increases. He expressed concern that if businesses and consumers begin to expect continued inflation, it could become a self-fulfilling prophecy.
Adding to the complexity, inflation has been hovering above the Fed’s 2 percent target, increasing pressure on Powell to avoid lowering rates, even if the economy shows signs of slowing.
“Inflation is coming in hotter than they anticipated even before tariff-driven effects,” Luzzetti said. “The messaging should be one where they are kind of in a wait-and-see mode.”
