Stagflation? Fed sees higher inflation and an economy growing by less than 2% this year
U.S. Federal Reserve Chair Jerome Powell testifies before a House Financial Services Committee hearing on “The Semiannual Monetary Policy Report to the Congress,” on Capitol Hill in Washington, D.C., U.S., February 12, 2025.
Nathan Howard | Reuters
Federal Reserve officials slashed their economic outlook in the latest projections released Wednesday, seeing the U.S. economy growing at a pace lower than 2%.
The rate-setting Federal Open Market Committee downgraded its collective outlook for economic growth to 1.7%, down from the last projection of 2.1% in December. In the meantime, officials hiked their inflation outlook, seeing core prices growing at a 2.8% annual pace, up from the previous estimate of 2.5%. The moves suggested the central bank sees the risk of a stagflation scenario, where inflation rises as economic growth slows.
In a statement, the FOMC noted the “uncertainty around the economic outlook has increased,” adding that the Fed is “attentive to the risks to both sides of its dual mandate.”
Fears of an economic slowdown and inflation reacceleration have increased significantly as President Donald Trump‘s aggressive tariffs on key U.S. trading partners are expected to raise prices of goods and services and dent consumer spending.
“Inflation has started to move up now. We think partly in response to tariffs and there may be a delay in further progress over the course of this year,” Fed Chair Jerome Powell said at a news conference. “Overall, it’s a solid picture. The survey data both household and businesses show significant large rising uncertainty and significant concerns about downside risks.”
For now, the Fed still expects to make two rate cuts for the remainder of 2025, according to the median projection, even as the inflation outlook was raised.
The so-called dot plot indicated that 19 FOMC members, both voters and nonvoters, see the benchmark fed funds rate at 3.9% by the end of this year, equivalent to a target range of 3.75% to 4%. The central bank kept its key interest rate unchanged in a range between 4.25%-4.5% on Wednesday.
Still, their view has leaned more hawkish in their rate projection, with four members seeing no rate changes in 2025. At the January meeting, just one official foresaw no changes in interest rates this year.
Here are the Fed’s latest targets:
— CNBC’s Jeff Cox contributed reporting.
