Fed delays its tough choice

President Trump’s ‘shock and awe’ policy approach has created uncertainties for consumers and businesses, in the short term at least, as well leaving the Fed with tricky decisions ahead.

19 March 2025

Spare a thought for the US Federal Reserve (Fed) which is potentially facing the unenviable combination of a slowing economy and higher inflation. It is probably too soon to use the word ‘stagflation’ but the basic ingredients are not hard to find.

Irrational exuberance fades – from boom to gloom?

How did we even get here? The new-found confidence in America that the second Trump era was supposed to encourage has instead given way to an outright stock market correction as the S&P 500 found itself dragged down by the technology sector. The chaos of the new administration is also now making itself felt in some high-frequency measures of economic growth. The Bloomberg consensus economist survey reveals a subtle downgrade in expected US economic growth for 2025 from 2.3% in February to 2.2% as of 19 March. Consumers are becoming cautious and according to Target CEO Brian Cornell - he should know - they are thinking about the potential inflationary impact of tariffs and how it will affect them. US retail sales have accordingly softened to 3.1% year-on-year growth down from the 4.4% growth figure at the end of last year, while consumer sentiment as measured by the respected Michigan Consumer Expectation survey is starting to nosedive.

Inflation worries are back, but never really went away

So how bad could inflation get? The Conference Board’s 12-month Consumer Inflation Expectation survey of 3,000 households has revealed a sudden jump to 6% in February from a still-high trough of 5.2% in January, revealing that consumers never really stopped worrying about inflation and that the tariff drama has only confirmed their worst fears. Officially, the latest US Consumer Price Index (CPI) inflation figure for February came in at 0.2% on the previous month, equating to an over-2.4% annualised rate, which of course is still ahead of the Fed’s official 2% target. While the Fed is leaving rates where they were at this latest meeting, the pressure will be on to do something in the not-too-distant future given how the macroeconomic landscape is evolving so rapidly. The futures market is now pricing in more than three outright cuts of 25 basis points each between now and the end of 2026 which of course would please the new President who believes that rates need to come down “a lot”. But the Fed will need to work out for itself what to prioritise given that its other mandate of course is to maximise employment.

Fed’s looming rates choice: stick or risk (independence, potentially)

So, the alternatives are: beat down inflation with higher rates and potentially send consumers over the edge while upsetting the President and threatening Fed independence? Or, ignore the inflation for now and support consumers (and by inference the stock market too) by sticking to an easing narrative? It is an almost impossible choice but the Fed can probably stall for time just a little longer given that growth is still ok (for now) and measured inflation has not gone out of control (yet). A few weeks, or days, or even hours of silence from the White House would be golden right now. Fat chance.