Growth forecast cut from 2.1% to 1.7%, inflation projections revised upward…Stagflation concerns spreading
Insight Press March 21, 2025
The Federal Reserve has significantly lowered its U.S. economic growth forecast for 2025 while raising its inflation projections, fueling concerns that the Trump administration’s economic policies are increasing uncertainty in the American economy.
Following a two-day Federal Open Market Committee (FOMC) meeting on March 19, the Fed maintained its benchmark interest rate at 4.25-4.50% while reducing its economic growth forecast for this year from 2.1% to 1.7%, a substantial 0.4 percentage point cut. This marks the second consecutive rate hold since the inauguration of Trump’s second administration and represents a dramatic revision of economic projections.
Notably, the FOMC statement included for the first time the phrase “uncertainty about the outlook has increased,” while removing previous language stating that “risks to achieving employment and inflation goals are roughly in balance.” This suggests the Fed has begun to seriously acknowledge the growing uncertainty in the U.S. economy.
“Tariff Policies Are the Main Cause of Economic Uncertainty”
Fed Chairman Jerome Powell emphasized that four major policy changes—in trade, immigration, fiscal policy, and regulation—are significantly influencing the economy and monetary policy direction. He specifically identified the Trump administration’s tariff policies as a key driver of economic uncertainty.
“Surveys of households and businesses show increasing uncertainty about economic prospects,” Powell noted, pointing to tariff policies as the primary cause. The Trump administration has been implementing aggressive trade measures, including increased tariffs on Chinese goods and a 25% tariff on steel and aluminum sectors.
The Fed stated that “recent indicators suggest that economic activity has continued to expand at a solid pace” and that “the unemployment rate has remained at a low level in recent months, and labor market conditions remain robust.” Despite this optimistic assessment, the significant reduction in growth forecasts reflects the anticipated negative impact of the Trump administration’s policy changes on the future economy.
Rising Price Pressures, Inflation Outlook Revised Upward
The Fed raised its year-end forecast for Personal Consumption Expenditures (PCE) inflation from 2.5% to 2.7%. Core PCE inflation, which excludes volatile food and energy items, was also revised upward from 2.5% to 2.8%. These adjustments reflect expectations that the Trump administration’s tariff policies will intensify inflationary pressures.
Powell explained these projections based on the assumption that inflation impacts from Trump’s tariffs would be “transitory.” He added, “If inflationary pressures are temporary, we shouldn’t tighten policy restrictively. By the time policy has its effect, it would slow economic activity.”
On the unemployment front, the year-end unemployment rate forecast was slightly increased from 4.3% to 4.4%. This adjustment likely considers the Trump administration’s ongoing plans for significant reductions in federal government workforce.
Rate Cut Outlook Maintained…Increasing Uncertainty
According to the Fed’s Summary of Economic Projections (SEP), the median forecast for the year-end benchmark rate is 3.9%. Compared to the current rate of 4.25-4.50%, this implies two 0.25% rate cuts this year, consistent with projections presented last December.
However, Fed policymakers’ views on rate cuts have become more cautious. Of the 19 policymakers, 11 anticipate at least two rate cuts this year, significantly fewer than the 15 who predicted this in December. Additionally, four members now expect rates to remain at current levels until the end of the year, up from just one member in December.
The interest rate differential between South Korea (2.75%) and the United States remains at 1.75 percentage points at the upper bound and may be adjusted following changes in the Fed’s interest rate policy.
Stagflation Concerns Spreading
Market observers have expressed increasing concerns about the possibility of stagflation following the Fed’s revised forecasts. Stagflation, a combination of “stagnation” and “inflation,” refers to a state where economic recession and rising prices occur simultaneously.
Bank of America noted, “While the dot plot anticipates two rate cuts this year, the distribution has changed somewhat,” adding that “the downward revision of growth forecasts, along with assessments of uncertainty and risk, reveals the Fed’s vigilance against stagflation.”
BNP Paribas pointed out the addition of language about uncertainty surrounding economic forecasts in the policy statement, stating that “this indicates disagreement among Fed members regarding the balance of risks.”
Nomura observed that “they repeatedly emphasized that the labor market is robust and the economy is in good shape,” suggesting that “conversely, this demonstrates the Fed’s concern about economic slowdown.”
Debate Over Recession Possibility
Regarding the possibility of economic slowdown leading to recession, Powell stated, “The possibility of recession exists with about a one-in-four (25%) probability in any situation,” adding that “while the possibility of recession has increased compared to two months ago, it was extremely low before, so there’s no need for concern.”
However, reflecting experts’ concerns, UCLA Anderson School of Management issued a recession watch for the first time since it began publishing economic forecasts in 1952. The warning cited the potential economic contraction resulting from the Trump administration’s tariff and immigration policies, as well as federal employee reduction plans.
The U.S. economy in 2025 faces challenging times due to policy changes by the Trump administration and resulting increased uncertainty. While the Fed is expected to closely monitor economic conditions and implement appropriate monetary policies, the conflicting challenges of inflationary pressures from tariff policies and slowing economic growth remain significant issues to be balanced.