Fed cuts US economic growth forecast despite Trump announcing golden era

AUTHOR:M.J. GDNUS

The central financial institution of the United States, the Federal Reserve, at today's monetary policy meeting kept reference interest rates at current levels, in line with expectations. However, the creators of US monetary policy showed signals that they still expect a reduction in borrowing costs by half a percentage point by the end of the year, with this projection based on expectations of a slowdown in economic growth and, ultimately, a decline in inflation.

Revised inflation and economic growth forecasts

The Federal Reserve has adjusted its inflation forecast, predicting an increase in the preferred measure of price growth. It expects inflation to be 2.7% by the end of the year, which is higher than the previously forecast 2.5% in December.

The Federal Reserve's long-term inflation target remains 2%. Despite this rise in inflation, the central bank lowered its economic growth forecast for this year, from 2.1% to 1.7%. The unemployment rate is also expected to rise slightly by the end of the year. Policymakers have expressed concern about the increased risks, with a near-unanimous view that the economic outlook for this year is uncertain.

In its policy statement, the Fed acknowledged the increased uncertainty, especially in light of early moves by the Donald Trump administration, including the imposition of global tariffs. Although the Fed did not directly mention the tariffs or President Trump in its statement, these circumstances are taken into account in the revised economic projections.

The interest rate remained unchanged in a range of 4.25% to 4.50%, and the central bank announced a slowdown in the reduction of its balance sheet, a process known as quantitative tightening. Fed Governor Chris Waller opposed the decision because of the change in balance sheet policy.

Interest Rate Projections

The Fed’s interest rate projections were in line with financial market expectations and supported the central bank’s general view that a gradual slowdown in inflation will allow for further monetary expansion. However, the path to that end may not be easy.

Although this year’s inflation projections have been revised upwards, the Fed appears to view the effects of tariffs as a temporary price change rather than a long-term inflationary pressure. Beyond 2025, the Fed’s inflation outlook remains unchanged, with inflation expected to reach its 2% target by the end of 2027.

The projections for interest rate cuts beyond this year also remain unchanged. The central bank expects the benchmark rate to fall to 3.1% by the end of 2027, which is considered a neutral level — neither stimulating nor discouraging consumption and investment.

After cutting interest rates by one percentage point last year, the Fed has kept rates unchanged since December, monitoring inflation trends and, more recently, assessing the potential impact of Trump’s economic policies.

Deteriorating economic conditions

Trump has promised an economic “golden era” driven by his policies, including tariffs, mass deportations, and deregulation. But the Fed’s forecasts do not reflect such optimism. Instead, they project GDP growth of 1.7% this year and 1.8% in 2026 and 2027. The unemployment rate is projected at 4.4% in 2024 and 4.3% in 2026 and 2027, above multi-year lows and above February’s 4.1%.

The most important takeaway from the Fed’s March meeting is that the U.S. economy is now on a path to significantly slower growth than it was before Trump returned to the White House. Officials now forecast annual GDP growth of 1.7%, a sharp drop from the 2.1% forecast in December. The cut in the projection marks a nearly 20% drop in the economy’s projected annual growth rate. The reversal coincides with the impact of Trump’s tariffs, which have led to a decline in consumer and business confidence. Consumer spending, which accounts for more than two-thirds of U.S. GDP, has been a particular concern. It fell in January, and while it did post a slight increase last month, it was well below economists’ expectations.

Market Reaction and Index Rise

The Fed’s outlook remains more optimistic than the Atlanta Federal Reserve’s real-time GDP forecast tool, which now points to a possible first-quarter GDP decline. However, the overall economic trajectory remains uncertain. Trump’s policies pose a complex challenge for the Fed because of their economic effects. His tariffs threaten to increase inflation and slow growth, while his aggressive immigration policies could create labor shortages in key industries.

Mass layoffs of federal workers could push some local economies into recession, while his deregulation and extension of the 2017 tax cuts could boost economic growth. Given these competing factors, it is still unclear what the ultimate effect of Trump’s policy on economic growth, inflation and the labor market.

Federal Reserve officials still expect two rate cuts this year, in line with projections from their December meeting. However, economic conditions have worsened further since Trump returned to power, with the threat of new tariffs adding to economic uncertainty.

The Fed's decision to keep interest rates unchanged sent U.S. stock markets higher. The Dow Jones Industrial Average rose 230 points, or 0.56%, while the broader S&P 500 index rose 0.8%. The Nasdaq Composite Index was the biggest gainer among the three major indexes, at 1.2%.

Stock prices held on to gains and continued to rise slightly after briefly falling earlier in the afternoon ahead of the Fed's decision. The decision to keep rates on hold was in line with investor expectations in financial markets.

Investors have been bracing for a prolonged period of high interest rates since December, after the Fed said it could delay a rate cut until early 2025. In the bond market, the yield on the 10-year U.S. Treasury note fell slightly to 4.277%.

The U.S. dollar index, which measures the greenback’s strength against a basket of six other major currencies, fell slightly after posting smaller gains earlier in the day.

Bitcoin, ether, and salt prices soar

The price of bitcoin and some other cryptocurrencies was steady during today’s Fed meeting in anticipation of new signals, before starting to rise. Bitcoin gained almost 4% from its price 24 hours earlier, and is trading above $84,600 at the time of writing.

The price drop ahead of the Fed meeting, followed by a significant increase after it was announced that key interest rates would be kept on hold for the third time in a row, caused the price of ether and salt to rise.

Ether recorded a growth of as much as 7.7%, rising to $2,000, while the value of salt increased by 5% to $129.50.