Adding to the confusion just days before top Fed officials meet is an actual war between Israel and Iran that threatens to raise oil prices.
Fed officials have signaled ahead of their two-day meeting this week that they are likely to leave interest rates unchanged.
“Bottom line, the bar that leads to Fed rate action remains high,” said Sam Bullard, senior economist at Wells Fargo.
Inflation has stayed low since the trade wars erupted, opening the door for Fed interest-rate cuts later this year.
The new forecast will tell us a lot about what Fed officials think will happen this year as they try to look through the fog.
Economy-threatening tariffs have been lowered by the Trump administration to more reasonable levels, but the U. S. has not yet negotiated trade agreements with the majority of other nations. Consumer trust has been damaged by the ongoing disputes, and businesses now find it difficult to plan and invest.
A real war between Iran and Israel that could cause oil prices to rise is adding to the uncertainty just days before a meeting of top Fed officials. Increased energy costs could harm the US and contribute to inflation as well. S. the economy.
According to a note sent to clients by Oxford Economics economists, “the economy has slowed and is vulnerable to anything else going wrong, including a sudden and persistent increase in oil prices.”.
When caught in fog, most people wait for it to clear.
Prior to their two-day meeting this week, Fed officials have indicated that they are likely to keep interest rates the same. They are hesitant to take any significant action until they have more proof of how well the economy is handling the ongoing conflicts.
Sam Bullard, a senior economist at Wells Fargo, stated that the bar that precedes Fed rate action is still high.
But the trade wars have undoubtedly hurt the economy.
The most obvious indicator was the first-quarter GDP contraction, which occurred for the first time in three years.
However, companies acted to stockpile imports prior to the tariffs taking effect, which is why GPD decreased.
The same was true for customers. To avoid the tariffs, for example, they purchased a large number of cars in March and April, which increased sales to a four-year high. Then, when tariffs went into effect in May, car sales fell 10%.
The cease-and-go trade wars have essentially produced a stop-and-go economy that is based on the president’s day-to-day statements regarding the United States. A. trade strategy.
The economy is now more hazy, and the Fed’s wait-and-see strategy has been solidified by the uncertainty surrounding future global trade regulations.
Central bank officials must still make every effort to forecast the economy’s likely course, though. And by presenting the revised projections, which they publish four times a year, they will accomplish that at the June meeting.
The Federal Reserve predicted in March that GDP growth would drop from slightly less than 3 percent in 2024 and 2023 to 1 point 7 percent in 2025. It is now anticipated that the central bank will reduce its growth projection once more.
How much? A recent survey of leading Wall Street DJIA SPX economists reduced their 2025 GDP prediction from nearly 2 percent prior to the start of the trade wars in March to 1 point 3 percent.
It is anticipated that slower economic growth will impede U.S. S. boosting the unemployment rate and creating jobs.
According to the Fed a few months ago, the unemployment rate will increase from its current 4point 2 percent level to 4point 4 percent by the end of 2025. The latest information might show that things are possibly worse.
One positive development thus far is that since the trade wars began, inflation has remained low, which has allowed the Fed to lower interest rates later this year.
Using the Fed’s preferred personal consumption expenditures price index, the inflation rate in April was 2.2%, which was close to the Fed’s long-term target of 2%.
In March, Fed officials projected that by year-end, inflation would reach 2 percent. Wall Street is betting on two rate cuts this year, and the Fed would have little room to move forward with them if they were to raise the forecast once more.
Keep an eye out. The updated prediction will provide valuable insight into Fed officials’ expectations for this year as they attempt to cut through the haze.
