Since President of the United States Donald Trump took office in January, he has imposed new tariffs, with more coming, on imported goods, begun to cull federal jobs and spending, jeopardized political relations with the European Union, and recognized that the US economic system, which at the end of 2024 demonstrated several positive indicators, is currently facing difficulties, against which the Federal Reserve is likely to be forced to reconsider its vision of the prospects of the dynamic of US gross domestic product (GDP) not in the direction of a more optimistic perception of the future.
Business and consumer sentiment in the mentioned country is on a downward trajectory. At the same time, some measures of manufacturing have weakened. The United States has also experienced a decline in shares, which have recently become a growth factor for household wealth. At the end of the current week, the corresponding indicators began to show signs of recovery, but so far it is unknown if this process is a temporary improvement in the situation or the beginning of a long-term strengthening. If US stocks continue to show a downward dynamic, there is likely to be a slowdown in spending among wealthier households, which is an important factor in the context of propping up overall consumption.
Recent statistics show that employment growth in the United States is predominantly persistent. Inflation also continues to be moderate in the US. At the same time, the tightening of Washington’s trade policy in the form of tariffs on imported goods and the retaliatory actions of world capitals affected by these measures are a factor that significantly increases the likelihood that the situation in the United States economic system may change in the foreseeable future. In this case, it implies the risk of deterioration of the current condition of the US economy. It is worth noting that even before the tightening of Washington’s trade policy, many experts warned that appropriate measures could have a negative impact on the economic situation in the United States. In this context, special attention was paid to the potential increase in inflation.
The mentioned conditions and circumstances of the current state of affairs in the space of the US economic system will be taken into account by officials of the country’s central bank, who will take part in a meeting on monetary policy next week. It is worth noting that these officials are the most important economic decision-makers outside the presidential administration. Next week, the Fed will formulate its vision of what changes have taken place in the economic landscape of the United States since the last monetary policy meeting in January.
Fed Chairman Jerome Powell, as noted by the media, prefers to refrain from value judgments involving a positive or negative perception of the measures in the context of commenting on the decisions of the Donald Trump administration. According to him, in January, the situation in the United States economic system was characterized as uncertain. He also claims that the risks that were mostly speculative two months ago have now become more tangible.
Economists surveyed by the media demonstrate an almost unified consolidated opinion, according to which the risks of a recession scenario in the United States economic system have increased in the short term. At the same time, some analysts interviewed by journalists claim that in the US, over time, a situation may form that provides for a slowdown in the upward dynamic of the country’s GDP with continued price growth.
In the context of making monetary policy decisions, officials of the central bank of the United States may be faced with the need to make difficult choices. Their actions, which involve cutting interest rates, will help support the economy and jobs. At the same time, keeping borrowing costs at a higher level will enable the US financial regulator to ensure control over inflation and inflation expectations.
According to media reports, the prevailing expectation among economists is that at the monetary policy meeting scheduled for March 18-19, officials of the central bank of the United States will decide to leave the current interest rates unchanged. The Fed will evaluate the results of the first months of Donald Trump’s rule in terms of indicators such as unemployment, inflation, and economic growth. Officials of the central bank of the United States, based on the mentioned assessment, will decide which monetary policy concept is most appropriate in the context of the current situation in the space of the US economic system.
Investors predict that the US financial regulator will lower borrowing costs by three-quarters of a percentage point over the next nine months. It is worth noting that in December, policymakers expected interest rates to be cut by half a percentage point.
In his last speech ahead of the meeting, Jerome Powell provided guidance on sticky inflation, inflation falling faster than expected, and an unexpected weakening of the labor market. This is what SGH Macro Advisors Chief Economist Tim Duy wrote after Mr. Powell’s appearance in New York last week. The expert separately noted that the head of the central bank of the United States does not provide guidance on higher inflation and weaker employment. It was also highlighted that this is currently the most interesting policy issue.
According to media reports, there may also be a conflict between the Fed’s 2% inflation target and the maximum employment targets. Journalists note that the corresponding probability can already be traced to the level of individual components of the content of the statements of policymakers. This risk has been formed against the background of Donald Trump’s large-scale plans for tariffs. Currently, concerns are circulating among experts that the implementation of the mentioned intentions may provoke a price shock in the United States. In the relevant context, from the Fed’s point of view, a sensitive circumstance is that the materialization of the specified scenario may cause what can be described as a shock to public expectations.
In combination with other actions that could slow down United States GDP growth, such as the firing of federal workers and the cancellation of federal contracts, the early days of Donald Trump’s administration have unleashed a contradictory set of forces that leave the US financial regulator to assess whether something that could trigger price increases will prevail or something that could cause a slowdown in economic rise and employment.
United States Treasury Secretary Scott Bessent called it all a period of detox to shift the economy away from public spending. US Commerce Secretary Howard Lutnick said that even a recession would be worth implementing Donald Trump’s policies.
For markets, everything that is currently happening in the economy in the context of decisions and their consequences is what can be called a source of downward pressure. The S&P 500 is down more than 10% from its record high last month. It is worth mentioning that when Donald Trump’s election, there was a kind of wave of optimism among business representatives, associated with expectations that he would keep a strong economy on track.
Rates on short-term Treasury securities have risen above long-term yields. At the same time, investors are accepting less return on a 10-year than on a three-month bill, which is an inversion of the yield curve, sometimes signaling a loss of confidence in the economy in the short term. Officials at the central bank of the United States are reluctant to put more weight on it. At the same time, the gap between 10-year and 3-month Treasury bonds was flagged in one of the Fed research reports as the most useful spread to monitor.
Currently, surveys in the United States also indicate a deterioration in sentiment among small businesses. A release from software company Intuit, based on data from businesses using their payroll software, showed that small firms shedding jobs in January.
The headline data, typically published in one-month intervals with a lag, has not changed that much lately. Moreover, most of this information relates to the days near the beginning of the current presidential term of Donald Trump.
Last month, companies added 151,000 jobs in the United States. At the same time, in the US, the unemployment rate remained at a relatively low level of 4.1%. It is worth noting separately that these data are too premature to reflect the likely impact of layoffs of government workers and at firms or institutions that have seen their federal contracts threatened or canceled.
As for the current perception by Fed officials of the prospects for the dynamic of inflation, they are convinced that the corresponding indicator is on a trajectory of steady movement towards the target of 2%.
In January, consumption in the United States showed an unexpected decline. Consumer-facing companies, including airlines and retail giants such as Target, warn of consumer caution and a flat sales outlook.
At the same time, indexes that try to track uncertainty, which can weigh on spending decisions by consumers and businesses, have spiked to levels not seen since the coronavirus pandemic.
Goldman Sachs economist Jan Hatzius has lowered the United States’ GDP growth forecast for 2025. The expert expects that the US economy will rise by 1.7% in the current year. The previous version of the forecast provided for a 2.4% GDP growth in the United States in 2025. Jan Hatzius stated that the downgrade is not related to the latest data on the condition of the US economic system. The expert noted that the decision on the downgrade is because assumptions about Washington’s trade policy have become considerably more adverse. In this context, special attention was paid to the size of the tariffs of the Donald Trump administration and the US president’s apparent intention to extend them globally. It was also highlighted that Mr. Trump’s administration now seems to be managing expectations toward tariff-induced near-term economic weakness.
