The US central bank has reduced its projections for economic growth this year in light of various challenges posed by the escalating trade war initiated by Donald Trump.
The Federal Reserve has decided to maintain its main interest rate within the target range of 4.25%-4.5% following the latest meeting of the Federal Open Markets Committee, as widely anticipated.
The accompanying statement revealed slightly higher expectations for inflation, but also a downward revision of the annual economic growth rate for this year from 2.1% to 1.7%.
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This decrease was attributed in part to weakened consumer spending, possibly influenced by the looming threat of price hikes due to the tariff agenda.
The Federal Reserve acknowledged the growing uncertainty surrounding its dual mandate covering employment and inflation.
During a press conference following the decision, Fed chair Jay Powell stated: «The overall economy is strong», emphasizing the solidity of labor market conditions.
Regarding the rise in goods inflation, Powell mentioned, «A significant portion of it is due to tariffs», while noting that differentiating non-tariff and tariff-related inflation in the data was premature.
The overarching message conveyed was that it was premature to speculate on the overall impact.
Policymakers expressed heightened concerns, with a broad consensus that the outlook for the year was murky, refraining from directly attributing the challenges to the protectionist policies pursued by the Trump administration.
The Federal Reserve disclosed its stance less than 24 hours before the Bank of England was expected to make a similar decision to maintain current interest rates, amid fears of price surges due to the escalating uncertainties of the trade war.
The Federal Reserve meeting occurred against a backdrop of mounting worries among financial markets and economists that the trade war could potentially push the world’s largest economy into recession.
Stock market values have significantly declined since the beginning of the year, with the S&P 500 experiencing a $4 trillion loss in less than a month at one point as tariff threats intensified.
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The dollar has depreciated by approximately five cents against both the pound and euro, while US government borrowing costs remain elevated.
Stocks experienced a modest rebound post the Federal Reserve’s announcement, indicating no immediate pressure for a policy shift, with the statement hinting at the possibility of two rate cuts throughout the remainder of 2025.
Economists in the US are particularly concerned about the trade war involving neighboring countries Mexico and Canada, which has yet to fully materialize as previously threatened due to multiple suspensions by the Trump administration.
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The primary domestic worry lies in the potential impact of retaliatory tariffs on cross-border supply chains and broader trade, potentially burdening US businesses with increased bureaucracy and costs that could ultimately be transferred down the supply chain, affecting consumers.
Tensions in the trade war between the three parties are expected to escalate starting April 2, following the EU’s response to US steel and aluminum tariffs with duties on US goods valued at €26 billion.
President Trump has already threatened to retaliate with 200% tariffs on EU alcohol imports, including wine and spirits.