The Federal Reserve has slashed its US growth forecast and lifted its inflation projection, underscoring concerns that Donald Trump’s tariffs and deep cuts to government spending will knock the world’s biggest economy.
The Fed’s latest set of projections showed officials now expect GDP to expand by 1.7 per cent this year, with prices forecast to rise by 2.7 per cent. Policymakers also kept the central bank’s main interest rate on hold at the end of a two-day meeting on Wednesday.
The new projections mark a significant shift from December, when officials on the Federal Open Market Committee, the central bank’s policy-setting panel, forecast 2.1 per cent growth for 2025 and estimated the closely watched personal consumption expenditures inflation gauge would end the year at 2.5 per cent.
US equities have sold off sharply in recent weeks as surveys have shown consumers and businesses are fretting over Trump’s tariffs on America’s biggest trading partners. Business leaders have noted in recent weeks that demand has cooled across the economy, while there are emerging signs that prices for key industrial goods are rising.
An FOMC statement on Wednesday, made after US rate-setters maintained the target range for the benchmark federal funds rate between 4.25 per cent and 4.5 per cent, said: “Uncertainty around the economic outlook has increased.”
The Fed has “signalled essentially that we are in a stagflation economy, with lower growth and higher inflation,” said Torsten Slok, chief economist at investment firm Apollo; “that was the implication of their forecast changes.”
The latest so-called dot plot projections show Fed officials broadly expect a further one or two quarter-point rate cuts this year — the same as in December — after lowering rates by 1 percentage point in 2024. However, four FOMC members now expect no cuts at all this year, against one in December.
Investors are expecting between two and three quarter-point cuts by the end of 2025.
The Fed also announced that it would slow the pace of its quantitative tightening programme, lowering the amount of US Treasury debt it allows to roll off its balance sheet each month from $25bn to $5bn beginning in April.
Fed governor Christopher Waller voted against the decision to slow quantitative tightening, saying the current decline of $25bn a month remained appropriate.
All of the voting FOMC members backed the decision to keep interest rates on hold.
