Federal Reserve Lowers US Growth Forecast Amid Increasing Tariff Concerns

The Federal Reserve has revised its growth forecast for the US economy downward as it continues to grapple with the implications of President Donald Trump’s tariffs, which have evidently contributed to rising prices.

In its latest announcement, the Fed maintained the benchmark interest rate at approximately 4.3%, where it has remained since December. They are currently adopting a cautious approach, opting to assess the impact of the White House's trade policies before making further adjustments.

Following the Federal Reserve’s announcement, President Trump took to his platform, Truth Social, urging the central bank to lower interest rates. “The Fed would be MUCH better off CUTTING RATES as US Tariffs start to transition (ease!) their way into the economy,” he stated, emphasizing his belief that easing monetary policy is necessary for economic recovery. He declared April 2nd as "Liberation Day in America," a sentiment that encapsulates his push for change.

Despite the potential volatility resulting from tariff-driven price increases, Fed Chairman Jerome Powell asserted that the economy remains stable, even amidst heightened uncertainty. He underscored the tariffs—additional taxes applied to imports—as major contributors to pricing pressures, indicating a likely slowdown in economic growth.

Since Trump assumed office, his administration has enacted a series of tariffs alongside proposed decreases in taxes and regulations. These moves, while aimed at boosting long-term growth, have, according to economists, sparked concerns about short-term inflation and added layers of unpredictability for businesses.

The ramifications of these policies have concurrently pressured the stock market, with the S&P 500 experiencing a notable plunge of 10% since February, falling back to levels observed last September. In response, Trump has acknowledged, albeit lightly, that his tariffs might cause some “disturbances” but remains optimistic about their long-term benefits.

The Fed’s forecasts indicate that inflation is now expected to reach 2.7% by year’s end, an increase from the previously anticipated 2.5%. Furthermore, growth expectations for this year have dropped from 2.1% to a mere 1.7%. While the Fed opted to keep interest rates intact, indications suggest possible rate cuts could occur before the year concludes.

In a bid to provide economic support, the Fed also announced a forthcoming slowdown in its asset sell-off, particularly concerning government debt, amidst rising inflation pressures. Whitney Watson from Goldman Sachs noted this as a ‘wait and see’ phase while the Fed monitors whether current downturns might escalate into a more severe economic issue.

Despite initial alarm over tariff impacts, Kevin Hassett, director of the National Economic Council, characterized these concerns as fleeting, aligning with Powell’s remarks that the tariff effects may not have a long-lasting impact.

After the Fed’s announcements, there was a modest rally in US stock markets, with the S&P 500 rising over 1%. However, experts warn about continued inflation risks, highlighting that the economic landscape is fragile. Consumer sentiment currently suggests a persistent expectation of rising prices, which could compel households to purchase now, inadvertently fuelling further inflation.

Lindsay James, an investment strategist at Quilter, pointed out that inflation remains a significant risk and cautioned that persistent price increases could spiral if current economic policies are maintained.

Chairman Powell emphasized that the Fed is vigilant and prepared to make necessary adjustments without rushing, opting to wait for more concrete data before any decisive moves. As the economic narrative unfolds, the interplay between tariffs, inflation, and interest rates will undoubtedly shape the trajectory of the US economy in the coming months.