The Federal Reserve is widely expected to hold interest rates steady when it meets this week, but investors will be watching for something else — any sign that President Trump’s policies are changing the central bank’s future expectations for the economy.
The Fed’s latest round of projections released Wednesday will include the much-studied “dot plot,” a chart updated quarterly that shows each Fed official’s prediction about the direction of the central bank’s benchmark interest rate.
The last dot plot, released in December, revealed a consensus among Fed officials for two cuts this year, revised down from four, as some were already factoring President Trump’s expected economic policies into their projections.
Now that Trump is putting those policies into action, including an aggressive slate of tariffs, the question is whether central bank policymakers will tweak their outlook for economic growth and inflation — and thus the direction of rates.
“They could be more worried when they look at the growth trajectory of the economy and model out what they think those tariffs mean,” former Kansas City Fed president Esther George told Yahoo Finance.
The markets are currently expecting three rate cuts this year, in summer and fall, due in part to concerns that Trump’s policies would hold down economic growth. The US stock market dropped 10% from its high set last month, partly due to those concerns, before recovering some of those losses on Friday.
Some Fed watchers are also worried about the inflationary effects of tariffs, arguing that the worst effects have not yet shown up in the data.
Read more: From $5 eggs to insurance premiums, here’s where prices are rising
“In March and April, we’re going to see a pretty big pickup in terms of inflation,” RSM US economist Tuan Nguyen told Yahoo Finance. “That’s going to be quite troubling for the market.”
George said she thinks Fed officials will maintain their estimate of two rate cuts because tariffs could, in fact, push up inflation later this year.
“Even though the market is pricing in three rate cuts, I’m just looking at this landscape and saying the Fed has an inflation problem too,” George said.
Luke Tilley, chief economist for Wilmington Trust, expects the Fed this week to retain its two-rate prediction, but he expects the central bank will end up cutting four times this year, starting in May.
He is in the camp that argues tariffs will lead to slower economic growth, offsetting any inflationary impact.
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“We’re in more of a growth scare over the course of the year than we are an inflation scare,” Tilley said.
Read more: What Trump’s tariffs mean for the economy and your wallet
Federal Reserve Chair Jerome Powell made it clear in his last public comments before this week’s meeting that the central bank still has time to assess how Trump’s policies are affecting the economy — without adjusting rates one way or another.
The Fed kept its rates on hold last month following three consecutive cuts at the end of 2024.
“As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” Powell said in New York City on March 7.
“We do not need to be in a hurry and are well-positioned to wait for greater clarity.”
The central bank leader added in a Q&A portion following his speech that “the cost of being cautious is very, very low. The economy is fine. It doesn’t need us to do anything, really, so we can wait and we should wait.”
Federal Reserve Chair Jerome Powell spoke in New York City on March 7. (Spencer Platt/Getty Images) ·Spencer Platt via Getty Images
Some recent economic data released for the month of February appear to support that view.
February’s jobs report showed 151,000 jobs were added last month, more than the 125,000 jobs seen in January. The unemployment rate ticked up slightly to 4.1% from 4%.
Inflation also eased in February, according to the latest reading of the Consumer Price Index (CPI).
The data released last Wednesday from the Bureau of Labor Statistics showed that “core” CPI — which strips out the more volatile costs of food and gas — rose 3.1% in February, down from 3.3% seen the month prior. This marked the lowest yearly increase in core CPI since April 2021.
A separate pricing measure known as the Producer Price Index (PPI) released last Thursday also showed that wholesale prices rose less than analysts expected in February.
But it wasn’t all good news, considering that economists use both CPI and PPI to estimate a reading on the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index.
The next PCE reading could reveal some new complications, since the components from CPI and PPI that pass through to PCE likely show the gauge remained elevated in February.
Bank of America economists and several other Wall Street research teams believe this would mean that “core” PCE, which excludes food and energy, will show prices increased 2.7% in February, up from the 2.6% increase seen in January.
“This would indicate progress on inflation continues to stall and reinforces our call for the Fed to remain on hold,” Bank of America US economist Stephen Juneau wrote in a note to clients.
Tilley, the Wilmington Trust chief economist, also doesn’t expect Fed officials to “change their story very much” at this week’s meeting, saying, “They are in this cautious stance where they have a lot of uncertainty about policy and tariffs, which is really keeping them from making any commitment one way or the other about rates.”
That could certainly change if economic growth weakens this year. Could the economy dip into a recession? It’s possible, Tilley added.
If steep tariffs “stay in place for three months, then we will be heading towards recession before the end of the year.”
Read more: What is a recession, and how does it impact you?
For now, Tilley sees 2025 growth of 1.8% but says there’s downside risk to the forecast if tariffs remain in place in a big way.
Perhaps the biggest worry on Wall Street now is the possibility of stagflation. That’s a reference to an economic scenario in which growth stalls, inflation persists, and unemployment rises — a toxic brew last experienced by many Americans during a stretch in the 1970s.
A reappearance of this scenario could force the Fed to make some tough decisions as it weighs its dual mandate to keep prices stable and ensure maximum employment.
“More aggressive tariff action creates a greater tension for their dual mandate,” said Matt Luzzetti, chief US economist for Deutsche Bank.
“Still-elevated inflation and some evidence that inflation expectations are on the rise imply that the Fed is likely to be slower to respond to any downside realizations on growth and the labor market.”
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