The Federal Reserve’s first set of projections since Donald Trump’s inauguration underscored—in the central bank’s understated and technocratic fashion—just how much the president’s plans to press ahead with widespread tariffs have turned the economic outlook on its head.
Months ago, policymakers presumed they would spend 2025 gradually cutting rates to keep inflation heading down without a big rise in joblessness to achieve the so-called soft landing. The latest projections point to the prospect that tariffs covering a swath of goods and materials will send up prices while sapping investment, sentiment and growth, at least in the short run.
“We now have inflation coming in from an exogenous source, but the underlying inflationary picture before that was basically 2½% inflation, 2% growth and 4% unemployment,” said Fed Chair Jerome Powell on Wednesday.
Officials projected weaker growth, higher unemployment and higher inflation than they had anticipated in December. Moreover, nearly all officials judged that if their forecasts were to be proven wrong, it would be in the direction of even softer growth, more joblessness and firmer price growth.
A combination of stagnant growth and higher prices, sometimes called stagflation, could make it harder for the Fed to cut interest rates this year to pre-empt any slowdown.
“You’re looking at a whiff of stagflation,” said Jay Bryson, chief economist at Wells Fargo. “I say stagflation with a small ‘s,’ not a capital ‘S.’ Those of us who are old enough to remember the late ’70s and early ’80s—this is not the stagflation of those years.”
Stocks rallied because a majority of officials penciled in two rate cuts for this year, the same as in December. Powell held out, with low conviction, the prospect that “tariff inflation” might not demand any meaningful change in the Fed’s interest-rate posture.
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