Why A Clash Between The Fed’s Powell And Trump Is Increasingly Inevitable

The Federal Reserve board’s forecast for the economy is running smack into President Donald Trump’s agenda.

Fed Chair Jerome Powell had previously avoided commenting on Trump’s tariff threats and other sweeping moves, but those policies are increasingly shaping prospects for the economy this year. That means central bank policymakers had to at least partially show their hand on what they think new tariffs will mean for inflation, the labor market and interest rates.

The early verdict they delivered on Wednesday: slightly slower growth and slightly higher inflation, a worrying scenario that the central bank may not be suited to addressing with its blunt tool of interest rate adjustments.

Asked at a press conference what drove the projection for a more rapid increase in prices, Powell acknowledged, “A good part of it is coming from tariffs.”

Even as the underlying economy remains strong, Fed officials projected that GDP would grow 1.7 percent in 2025, a drop from their 2.1 percent estimate in December. And they expect their preferred measure of inflation to rise 2.7 percent, up from their previous guess of 2.5 percent.

“Uncertainty around the economic outlook has increased,” the central bank's rate-setting committee said in its post-meeting statement.

Fed officials met against a backdrop of anxious financial markets and sinking consumer confidence as Trump’s unpredictable tariff policies play out. The rate-setting committee held borrowing costs steady but continued to pencil in two rate cuts this year, a signal that while they expect higher tariffs to feed price increases in the short term, they don't expect persistently higher inflation to result.

Still, Powell told reporters that when it comes to inflation, “progress is probably delayed for the time being.”

The Fed chief’s attempts to lay low on the impact of Trump's policies will continue to get harder. That raises the specter of a new conflict with the president, who regularly tweeted his dissatisfaction with the Fed chief for not cutting interest rates during his first term.

Higher duties on major U.S. trading partners are likely to slow economic activity, which would call for the Fed to lower rates. But they will also push up costs, fueling upward pressure on consumer prices. That could prompt the Fed to keep rates where they are — or, at worst, even begin to raise them again.

Other administration moves could also affect the outlook — deregulation and tax cuts could boost growth, while deportations could shrink the pool of available labor, driving up costs. Meanwhile, Elon Musk’s Department of Government Efficiency is pursuing deep cuts to the federal bureaucracy that could ripple out to parts of the private sector and begin to push up unemployment, further complicating the central bank’s job.

For his part, Trump said the economy might go through “a period of transition” as tariffs go into place.

“What we’re doing is very big,” he said on Fox Business earlier this month. “We’re bringing wealth back to America. That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”

Commerce Secretary Howard Lutnick told CBS News last week that if the U.S. enters a recession because of Trump’s policies, it will be “worth it.” (That was days after he declared that “there’s going to be no recession in America”).

“The only reason there could possibly be a recession is because the Biden nonsense that we had to live with,” Lutnick told CBS. Trump's “policies produce revenues. They produce growth. They produce factories being built here.”

Powell told reporters on Wednesday that the prospect of a recession “has moved up, but it’s not high.” But the net effect of all of this on the economy is just guesswork.

“Uncertainty is heightened, and that does seem to be having some negative effects, but so far they have not seen that spill over into real economic data,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Luzzetti said the wide range of outcomes might mean that Powell simply underscores officials’ lack of confidence behind their projections, since the varying sizes of potential tariffs could lead to wildly disparate outcomes.

In his final remarks before the Fed’s pre-meeting blackout — officials don’t comment on monetary policy before a rate decision — Powell said the central bank will be watching whether there are “a series” of trade-related policy changes that could lead to more persistently rising prices, particularly as that might make consumers and businesses expect inflation to continue, which can be a self-fulfilling prophecy.

On top of that, inflation has still been hovering above the Fed’s 2 percent target, which might add to pressure on Powell to not lower rates, even if the economy begins to weaken.

“Inflation is coming in hotter than they anticipated even before tariff-driven effects,” Luzzetti said. “The messaging should be one where they are kind of in a wait-and-see mode.”