President Donald Trump's inauguration promise in January that "the golden age of America begins right now" remains unfulfilled in the outlook of Federal Reserve officials who so far see his policies slowing the economy, raising unemployment and inflation, and clouding the horizon with a still-unresolved tariff debate that could deliver a fresh shock in coming weeks.
The U.S. central bank's response has been to put planned interest rate cuts on hold until perhaps the fall while the debates over tariffs and other administration priorities unfold, and to project a slower eventual pace of rate cuts to a higher stopping point. Effectively it embeds steeper borrowing costs into Fed policymakers' outlook to insure against inflation they now see as higher in coming months than they did before Trump took office for a second time.
That isn't welcome news for Trump, who has called Fed Chair Jerome Powell "stupid" for not slashing rates immediately. It is no more welcome for U.S. consumers and homebuyers hoping for lower financing costs. And it puts the Fed somewhat out of step with other central banks that continue to lower rates.
But it does highlight how much Trump's early policy moves, particularly on tariffs, have reshaped the short-term outlook for the world's largest economy, which at the end of last year was seen on track for continued above-trend growth, full employment and inflation steadily falling to the Fed's 2% target. The steady series of rate cuts policymakers anticipated just six months ago has been replaced with a more tentative path as they wait for Trump's final decisions on tariffs and watch how the job market, consumer spending and inflation evolve.
"We feel like we're going to learn a great deal more over the summer on tariffs," Powell told reporters on Wednesday after the Fed held its benchmark overnight rate in the 4.25%-4.50% range for the fourth straight meeting, and issued new projections showing inflation rising substantially by the end of this year and coming down slowly after that point.
Trump has latched on to recent weak inflation readings to argue for rate cuts, reiterating on Thursday that the Fed should slash its benchmark rate nearly in half and noting earlier in the week that the European Central Bank and others had kept easing monetary policy.
But, referring to the impact of the tariffs imposed so far, Powell said "we hadn't expected them to show up much by now, and they haven't ... We will see the extent to which they do over coming months ... That's going to inform our thinking."
LITTLE CONFIDENCE
At this point, investors expect the Fed to cut rates at its September 16-17 meeting, though much will depend on what happens during Powell's summer of watching and waiting.
The most aggressive of Trump's tariff plans, levies on most trading partners announced on "Liberation Day" in early April, were postponed after bond yields spiked, stocks dropped, and economists began penciling in a U.S. recession. The pause ends on July 9, with countries, including those in the European Union's combined trading bloc, supposed to negotiate deals by then or face steep import levies - 50% in the case of the EU.
The only completed deal so far is a limited agreement with Britain.
Though the Fed's new policy statement this week said "uncertainty about the economic outlook has diminished" since its May 6-7 meeting, when volatility around the trade issue was still intense, the situation could change quickly based on the July 9 deadline.
"We don't yet know with any confidence where they will settle out," Powell said.
At the meeting last month, a Fed staff projection regarded a recession this year to be "almost as likely as the baseline forecast" of slowing but ongoing growth.
The situation has since improved somewhat. Powell on Wednesday said the economy remains "solid," adding that as the risk of the most severe tariffs has abated, companies have begun to puzzle through how they might adapt to more modest levies.
"Businesses were in a bit of a shock after April too ... There's a very different feeling now that people are working their way through this ... It feels much more positive and constructive than it did three months ago," he said. Prices of equities have marched higher as well, and the spike in Treasury yields that drove talk of the diminished status of the dollar has also eased.
DIMMER OUTLOOK
But skirting a recession is a large step from where the Fed was at the end of last year, when it was in sight of a "soft landing" from the high inflation of the COVID-19 pandemic era.
The economy was at full employment and steadily growing above trend, inflation was on track to fall to the Fed's 2% target, and the central bank expected to steadily ease borrowing costs.
"The U.S. economy is just performing very, very well," Powell said after the Fed's December 17-18 meeting, a session at which staff and officials had just begun thinking through the implications of a trade war that became much bigger in scope than they expected. "The outlook is pretty bright."
It has dimmed since then.
In projections issued this week, Fed policymakers' median outlook for gross domestic product growth had fallen to 1.4%, well below trend, from the 2.1% projected in December, with the unemployment rate projected to rise from the current 4.2% to 4.5% by the end of the year. That would be the highest level, outside of the pandemic unemployment spike, since early 2017, when Trump's first term was starting.
Inflation that Powell said had been "grinding down" is now anticipated to rise to 3% this year and remain nearly half a percentage point above the Fed's target through 2026.
The job market remains solid, Powell said, but he cautioned that assessment could change, and policymakers have said that their policy expectations could shift quickly if employment falters.
"Labor demand is softening," Powell said. "There's not a lot of layoffs, but there's not a lot of job creation. If you're out of work, it is hard to find a job ... That is an equilibrium we watch very, very carefully because if there were to be significant layoffs and the job-finding rate were to remain this low, you would have an increase in unemployment fairly quickly."
