Gloom is growing at the US Federal Reserve about the health of the American economy, with the central bank cutting its 2025 growth estimate and revealing a growing split on whether there will be any rate cuts this year.
The Fed left the US interest rates at 4.25% to 4.5%, despite incessant demands from Mad King Donald for immediate and large cuts in rates.
In fact, the latest forecasts and “dot plot” — which shows where Fed members think rates will be going over the next three months to two years — show seven of the 19 Fed members now foresee no cut in US interest rates this year, up from four members in March. The plot showed that the majority of members still expect rates will drop to the target range of 3.75% to 4%, meaning two reductions in the next few months. But there are now fewer cuts forecast for 2026 and 2027.
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That’s despite the Fed’s newest outlook being a little gloomier than its March forecasts. The new economic projections show the Fed expects unemployment to rise this year by more than estimated in March, and for prices to pick up more than previously expected. The Fed now sees the core personal consumption expenditures price index (PCE inflation), which excludes food and energy, to increase by 3.1% in 2025, higher than the March forecast of 2.8%. PCE inflation was 2.1% in April, matching its lowest level since February 2021. Excluding food and energy, core PCE stood at 2.5%, with energy prices the big imponderable as oil and petrol prices jumped after Israel’s attacks on Iran.
Economic growth is also expected to slow to just 1.4% this year compared to 1.7% in March. Both would be down from the solid 2.8% seen in 2024 under Joe Biden. Unemployment is now expected to average 4.5% by the end of this year, up from the 4.4% estimate in March.
Fed Chair Jerome Powell said in his post-meeting news conference that he expects Trump’s tariffs to eventually translate into higher inflation, but said the extent remains unclear. That will need to become apparent for the Fed to lower borrowing costs again, he said. “We have to learn more about tariffs. I don’t know what the right way for us to react will be,” he told reporters. “I think it’s hard to know with any confidence how we should react until we see the size of the effects.”
That’s partly down to the chaotic nature of Trump’s policymaking, with the TACO syndrome at play in relation to threatened tariffs on key US suppliers like China.
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The chaos isn’t confined to tariffs. US farmers have been complaining loudly about the impact of Trump’s immigration raids on their production, which threaten to send their primary workforce into hiding, leave produce to wither on the vine, and push up food inflation. Five days ago, Trump ordered ICE officials to stop raiding farms, hotels and restaurants in pursuit of undocumented migrants. But then on Monday, Trump backflipped again, and the raids were resumed. Good luck to US employers trying to keep track of policy.
Ahead of the Fed meeting, Trump once again insulted Powell, calling him stupid, “political” and “too late” at lowering interest rates, and threatened to appoint himself — or perhaps his horse — to the Federal Reserve.
But American consumers have signalled their opinion of Trump’s policies. Retail sales dropped sharply last month as car purchases plummeted. Consumer spending accounts for about two-thirds of the US economy, and the wrecking of consumer confidence is a key factor in the economic slowdown now gripping America.
Normally, the Fed would respond with interest rate cuts, but while Trump’s pro-inflationary policies remain locked in, the Fed is trapped in a waiting game to see how it can fix the damage.