USA Fear of recession: what the Fed says about the US economy
Economic forecast revised downwards, inflation outlook raised: Overshadowed by US President Donald Trump's aggressive tariff policy, the US Federal Reserve publishes its new economic estimate.
20.03.2025, 04:40
SDA
"Uncertainty about economic developments has increased", reads the statement from the world's largest central bank. There are concerns in the USA that the US economy could slide into recession due to Trump's trade policy. Trump has recently caused chaos and confusion with his tariff announcements.
The Republican imposed tariffs on goods from Canada, Mexico and China and on steel and aluminum imports. Trump withdrew some of the tariffs on goods from Canada and Mexico, at least for the time being. New tariffs - also explicitly against the European Union - are to be imposed at the beginning of April. Fed Chairman Jerome Powell emphasized that it is difficult to predict how the economy will develop at this point in time. But he also made it clear: "There will be tariffs, and they tend to slow down growth at first. They tend to boost inflation."
What do the figures say?
1. the economy:
The Fed has revised its economic forecast downward, predicting slower growth of 1.7 percent this year. In December, the central bank was still forecasting 2.1 percent. Powell says that although the risk of a recession has increased, it is not high. A recession is an economic downturn in which gross domestic product shrinks, unemployment rises and investment falls.
Tariffs make trade more expensive as production costs rise for US companies. This can result in higher prices for consumers. Countermeasures by affected trading partners make exports more expensive and reduce the competitiveness of American companies. All of this can lead to a decline in production and ultimately to people losing their jobs. This weakens the economy.
Trump, on the other hand, says that his aggressive tariff policy would bring production back to the USA and thus strengthen the domestic economy. This will initially cause "a bit of unrest". However, he did not explicitly rule out a recession in a recent interview. The Fed's data so far predicts slower growth, but not a shrinking economy. Elmar Völker, Chief Economist at Landesbank Baden-Württemberg, comments that the "US economic engine is beginning to stutter".
1. inflation:
The Fed's job is to keep inflation in check. It is aiming for an inflation rate of 2 percent. The central bank now expects an average inflation rate of 2.7 percent this year - slightly higher than previously assumed. In December, the forecast was 2.5 percent. For next year, the Fed is forecasting 2.2 percent (December 2.1 percent), and in 2027 the inflation rate should then be 2 percent, as predicted three months ago.
Powell says that a "good part" of the inflation forecast is due to tariffs. The Fed chairman also emphasizes that the Fed is getting closer to its goal of price stability, but that the tariffs could prolong the process of getting there. High inflation is bad for the economy, it reduces purchasing power, creates uncertainty and inhibits growth. In the summer of 2022, inflation had reached its highest level in decades - the inflation rate was more than 9 percent.
1. interest rates:
The Fed is currently taking a wait-and-see approach. As in December, it assumes in its new forecast that the key interest rate will average 3.9% in 2025. This points to two small interest rate cuts by the central bank this year. At its current meeting, the Fed decided - as it did in January - to keep the key interest rate stable. It therefore remains at a high level in the range of 4.25 to 4.5 percent.
Powell has now made it clear that the US central bank is in no hurry to turn the interest rate screw. It would first have to see what impact Trump's economic policy would have. Some analysts even assume that the Fed will only make one small interest rate hike this year. "In view of the high level of uncertainty, patience is obviously the order of the day for the Fed," write Bernd Weidensteiner and Christoph Balz, analysts at Commerzbank.
High interest rates put pressure on economic growth. In the fight against high consumer prices, the Fed raised the key interest rate significantly. Last year, the central bank then began to slowly lower interest rates again in view of the falling inflation rate, but is currently stepping on the brakes. Low interest rates make loans cheaper, boosting consumption, investment and growth.
1. unemployment:
In its current forecast, the Fed predicts that unemployment will rise slightly - to 4.4 percent (December: 4.3 percent). This means that the unemployment rate is at a low level. The situation on the US labor market has not been problematic so far. The labor market has proven to be resilient in recent years. However, current data points to a slight slowdown, as the number of people in employment rose below expectations in February.
"It's not that the economy isn't growing. It's not that inflation is really high. And it's not that unemployment is high. It's not any of those things," says Fed Chairman Powell, summarizing the current economic situation. But people are simply dissatisfied because of the high prices, Powell said. The US economy is currently "healthy". However, it is unclear what consequences the "significant economic policy changes" of the "new administration" will have. Powell does not mention Trump by name once in his press conference.
