When inflation was too high and the economy was resistant after pandemic, the Federal Reserve decision to drastically increase interest rates from 2022 seemed obvious. The same was true more than two years later, when inflation had fallen abruptly from its recent peak and the labor market had begun to cool. That raided the way for the Central Bank to decrease the costs of indebtedness at a percentage point in 2024.
What made those relatively direct decisions was the fact that the objectives of the Fed to achieve low and stable inflation and a healthy labor market were not in conflict with each other. The officials did not have to choose between safeguarding the economy by reducing rates and the elimination of price increases keeping high rates or raising them more.
Economists care that I could soon change. The economic agenda of President Trump of tariffs, expenses of expenses and mass deportations run the risk of stealing inflation, while at the same time abolish growth, an undesirable combination that could lead to much more difficult compensation for Fed.
“We are reaching a more difficult decision point for the Fed,” said Nela Richardson, an ADP chief economist, the payroll processing company.
Jerome H. Powell, the president of the Fed, indicated little concern for this dilemma on Wednesday after the Fed decision to maintain interest rates without changes for a second consecutive meeting in the light of a highly “uncertain” economic perspective.
Mr. Powell warned that “greater progress can be delayed” by recovering inflation to the 2 percent target of the central bank due to rates. A combination of growing inflation and weaker growth would be “a very challenging situation for any central bank,” he admitted, but it was not one that the Fed was currently found.
“There is not where the economy is at all,” Powell said during a press conference. “Nor is it where the prognosis is.”
It is unlikely that the United States is in a complete period of stagflation, in which inflation, growth contracts and unemployment peaks are triggered. But economists are not yet ready to rule out the possibility that real tensions between Fed’s objectives can arise in the coming months given the scope of Trump’s plans.
“There is a risk that there is confidence outside inflation,” said Michael Gapen, chief economist of the United States from Morgan Stanley. Mr. Powell came out as “very complacent,” he added.
During the press conference, the president seemed not upset by the growing inflation expectations captured in a recent survey from the University of Michigan, which showed the participants to grieve abruptly in the perspectives.
He also resurrected the notion that an inflation clash caused by problems related to supply such as tariffs could be “transitory.”
Tariffs are expected to be an import tax, increase costs for consumers. The question is whether those increases will feed on persistently greater inflation.
The word “transitory” gained notoriety after the Fed and other forecasters used it to initially describe the price pressures that arose after the pandemic. Those ended up being much more pernicious, which led to the worst inflation shock in decades.
The new projections published by the FED on Wednesday seemed to suggest that the officials were prepared to see, or not to react, the price -induced price pressures, which saw their preferred inflation measure lifted, once the prices of food and energy are eliminated, to 2.8 percent by the end of the year. That would mean an acceleration of the pace of 2.6 percent of January. At the end of 2026, they expect it to resort to 2.2 percent.
Officials simultaneously marked their forecasts for growth to 1.7 percent from 2.1 percent in December, while increasing to 4.4 percent unemployment, a backdrop that essentially hopes to remain in place until 2027.
Despite these changes, most policy formulators were left with previous estimates for a reduction of half of a percentage point in rates this year, or two more cuts. Another two are expected in 2026. Investors interpreted that this is an extremely misleading approach, feeding a demonstration in the markets of government shares and bonds.
However, giving some economists stop the significant inherent uncertainty not only in officials of officials, but also in the way Mr. Powell spoke about the perspective.
Policy formulators accumulated in a much greater degree of uncertainty than in December and widely saw greater risks for their inflation, growth and unemployment estimates, they showed their projections. The growing uncertainty also reached the Fed updated policy statement, and at a time during the press conference, Mr. Powell characterized it as “remarkably high.”
At one point, when asked about the fees forecasts of the officials, he joked: “What would you write? It is really difficult to know how it will work.”
That uncertainty has asked questions about how much actions put in the most benign financial markets seem to be fixing their hopes.
Tim Mahedy, who previously worked in the Fed of San Francisco and is now chief economist of Access/Macro, a research firm, said that the most recent experience of the central bank “chopped” by inflation and the fact that it had not yet expired completely meant that the bar so that officials responded to economic weakness was higher than the case would be.
“They will be a bit more tolerant of growth in growth in relation to an increase in inflation,” added Peter Hooper, who worked at the Fed for almost 30 years and is now vice president of research at Deutsche Bank. “They recognize that if they let inflation escape, that will make the impact of growth worse on the road and limit its ability to compensate it.”
