The US central bank has slashed its expectations for economic growth this year as it eyes challenges on several fronts amid Donald Trump’s escalating trade war.
The Federal Reserve announced, as was widely expected, that it would keep its main interest rate at its current target range level of 4.25%-4.5% following the latest meeting of its Federal Open Markets Committee.
The statement that accompanied that decision showed slightly elevated expectations for inflation but also a forecast that the annual rate of economic growth this year had been cut from 2.1% to 1.7%.
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The reduction partly reflected weaker consumer spending, the Fed said, explaining that could be partly explained by the threat of rising prices due to the tariff agenda.
The central bank admitted rising uncertainty over its dual mandate which covers employment as well as inflation.
At a news conference to accompany the decision, Fed chair Jay Powell said: “The economy is strong overall”, adding that labour market conditions were “solid”.
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But on the question of rising goods inflation he said: “A good part of it is coming from tariffs”, adding that it was too soon to split non-tariff and tariff-related inflation in the data.
The core message was that it was too early to predict the impact overall.
Fed revealed its hand less than 24 hours before the Bank of England was expected to follow suit by also holding off on any fresh rate cut amid risks of surging prices due to the growing trade war uncertainty.
The Fed meeting took place against a backdrop of mounting concern among financial markets and economists that the trade war could lead the world’s largest economy into recession.
Stock market values are well down on where they started the year, with the broad-based S&P 500 losing $4trn in the space of less than a month at one stage as the tariff threats intensified.
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The dollar remains around five cents down against both the pound and euro while US government borrowing costs also remain elevated.
US economists are particularly worried about the trade war involving the country’s nearest neighbours Mexico and Canada – yet to get into full swing as had been threatened due to several suspensions by the Trump administration.
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The main domestic concern is that tit-for-tat tariffs will hammer cross-border supply chains and wider trade, leaving US businesses drowning under a mountain of red tape and higher costs, the latter being widely tipped to be passed on down supply chains and ultimately hitting consumers.
Trade war hostilities between the three are set to ramp up from 2 April – a day after the EU retaliates to US steel and aluminium tariffs with duties being applied to US goods worth €26bn.
Mr Trump has already threatened to respond with 200% tariffs on EU alcohol imports including wine and spirits.
The Fed maintained its guidance that two interest rate cuts were expected this year.
