The Federal Reserve looks poised to revise down its GDP growth forecast for the year. This amendment is a direct reaction to the new post-Liberation Day tariffs that just became law. This adjustment comes as central bank officials continue to navigate the complexities of inflation and geopolitical uncertainty, which have further blurred the economic outlook. The terminal rate forecast remains unchanged at 3.00-3.25%. This is a dovish tilt to the monetary policy stance that falls just short of where current markets are pricing.
What should be most concerning are the advance revisions coming down the pike in GDP growth. They paint a picture of steep tariffs depressing consumer prices and stifling economic activity. The 2025 forecast is now a paltry +0.9%. It’s below the consensus estimate of 1.0% and well below the prior 1.7% projection made in March. So far, officials are still very confident in the solidity of predictions for 2026. Their prediction for that year is currently +1.8%, which matches the consensus and is unchanged from previous forecasts.
In recent testimony before Congress, Federal Reserve Chair Jerome Powell acknowledged this fact when he told legislators that inflation risks have recently tilted more to the upside. So in March, when Federal Open Market Committee (FOMC) participants were feeling the same way. Further, they observed that while risks to GDP and unemployment were more evenly balanced, inflationary pressures continued to be a key concern. Powell has repeatedly stated that the level of uncertainty around potential growth and inflation has increased, making it more difficult for policymakers to make the right decision.
This change reflects increasing concern about the persistence of inflationary pressures. Reduced energy prices might mitigate part of the effect that tariffs are having on headline PCE figures. That provides real hope to American families who are struggling with increasing costs.
Amid these developments, some FOMC members have expressed openness to the possibility of cutting interest rates one or two times throughout 2025, depending on prevailing economic conditions. This position demonstrates your willingness to adjust to a new reality. Meanwhile, you’re hard at work avoiding any moves that could improperly tighten financial conditions during this great tariff uncertainty.
The geopolitical situation further complicates and darkens the economic picture, resulting in increased wariness among policymakers. The role of domestic economic indicators combined with outside world factors has created a perfect storm where looking ahead with confidence has been difficult to say the least.
Wage growth is still a key factor in determining the economic picture overall. Currently hovering just above 4% per year, it provides some support for consumer spending, but its sustainability amid rising costs and potential tariff impacts remains to be seen.