US Fed puts rates on hold amid higher prices and slower growth as Trump trips up US economy

Donald Trump’s ideological war on trade, delivered at ‘muzzle velocity’ is making the job of the Federal Reserve next to impossible.

Overnight, US Federal Reserve Chairman Jerome Powell admitted to reporters that “uncertainty today is unusually elevated” resulting in a nightmarish scenario for decision-makers.

“Forecasting is always very very hard, and in the current situation, uncertainty is remarkably high,” Mr Powell confessed. “The news is full of developments of tariffs being put on and taken off and you’re trying to extract a signal from that.”

It’s not just the Fed that has been caught on the hop, the consumers and businesses are too.

“The survey data — both household and businesses — show significant rise in uncertainty and significant concerns about downside risk,” Mr Powell said, while noting that survey readings and actual outcomes are uncoupling.

The message the markets wanted to hear was how big an impact tariffs were having on the economy.

He expected that inflation would be higher in the short term, but potentially transitory.

“Some near-term measures of inflation expectations have recently moved up. We see this in both market and survey-based measures, and survey respondents — both consumers and businesses — are mentioning tariffs as a driving factor,” Mr Powell said.

“Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 per cent inflation goal.”

Mr Powell seems as unsure as the rest of us whether Trump’s tariff plans will stick and has taken a wait-and-see approach to inflation.

That meant keeping rates on hold at this meeting at 4.3 per cent.

“We think it’s a good time for us to await for further clarity,” Mr Powell said.

That pleased the markets, which rocketed up 1 per cent after the announcement, as they read into statement that the economy was neither slowing too fast due to uncertainty, not inflation rocketing away.

The architect of the chaos was less impressed.

“The Fed would be MUCH better off CUTTING RATES as U.S.Tariffs start to transition (ease!) their way into the economy,” Mr Trump said on Truth Social. “Do the right thing. April 2nd is Liberation Day in America!!!”

It won’t be.

What it will be is another set of spikes thrown onto the road of the economic recovery.

US growth to slow

Tariff turmoil is starting to eat into the economic strength that Trump inherited.

While Mr Powell called out an economy that is “strong overall”, the Fed has downgraded its expectations for growth from 2.1 per cent to 1.7 per cent in 2025. It puts the economy a long way back from the 3.1 per cent growth at the end of Joe Biden’s term - conditions that Mr Trump has described as “an economic catastrophe”.

Powell is remaining steadfast in the face of Trump’s Truth Social bombs, and is probably immune to him in any case, having weathered such epithets such as Mr Trump asking “who is our biggest enemy Jay Powell or Chairman Xi?”, and the President calling Fed economists “boneheads”.

Mr Powell can’t use anything like the language of Mr Trump to describe the potentially catastrophic impact on the US economy, but the takeaway was clear, according to Christian Baylis, chief investment officer of Fortlake Asset Management.

“All the to-ing and fro-ing on tariffs is starting to move into the consumption numbers and Powell is calling that out without throwing grenades at Trump,” Mr Baylis said.

“If you read between the lines, there are consequences for using the US consumer like a rag doll. Ultimately you’ve got to be careful using that part of the economy to get what you want.”

For now, the Fed’s view is the inflationary trajectory is sufficiently benign to warrant more interest rate cuts down the track.

Forward projections - the so-called dot plot - show the majority of the Fed’s Board members still anticipate two more rate cuts this year but the number of members who are convinced conditions are appropriate for a cut are dropping.

In an encouraging sign, the dot plot sees a world where interest rates fall to a little above 3 per cent by 2027 - a level that would give room for Australia to also cut rates.

Westpac thinks the Fed is probably too optimistic on its growth forecast, and said “risks will remain skewed to the downside.”

The prospect of a slowing US economy will ripple across to Australia.

Mr Baylis said the expectation of a decline in US has coincided with an Australian jobs report that shows a “softish set of numbers” in terms of the participation rate.

The Australian Bureau of Statistics data revealed that older workers particularly are dropping out of the job market.

“Fewer older workers returning to work in February contributed to the fall in employment this month, with lower levels of employment in the older age groups in February 2025 compared with 2024,” the ABS said.

The unemployment rate rose to 4.1 per cent after eight months of gains with analysts speculating whether the drop off was a either a sign of a softening in the economy, or a shift out of the workforce of women who traditionally were employed in the care economy of healthcare, childcare and education.

“Could less participation and fewer older workers returning to work signal less need to work or softening and more challenging labour market conditions? Is it temporary or the start of something more permanent?” RBC Capital’s Su-Lin Ong postulated.

Callam Pickering, chief economist at job site Indeed, was more bullish, suggesting that the decline in the underemployment rate was a positive sign.

“The share of Australians with a job who would prefer more hours fell to its lowest level since August 2008,” Mr Pickering said. “Given cost-of-living pressures, that’s obviously a great outcome, and it means that a larger share of the workforce has been able to find the hours they need.”

Mr Pickering said that the Reserve Bank would likely look through the surprise lift in unemployment in February, but would be watching for another week outcome in March which would “give them a lot to think about”.

“The decision on whether to cut or not though will ultimately come down to the next set of quarterly inflation figures, released at the end of April. Every other data release feels secondary at the moment, including the labour force survey,” he said.

“The market continues to price in a high likelihood of a rate cut by July and we think a cut in either May or July is still likely.”

A cut in May or July would be welcome news for an economy that is still relatively fragile, as long as we don’t get “rag-dolled” by idiotic tariff policies in the meantime.