Federal Reserve Lowers Economic Forecasts
The Federal Reserve has revised its expectations for the US economy this year, downgrading several key economic indicators.
The central bank is observing a slowdown in economic growth, an uptick in unemployment, and rising prices, all influenced by significant changes in US trade policies and escalating geopolitical tensions.
For 2025, the forecast for Gross Domestic Product (GDP) growth has been adjusted to 1.4%, down from 1.8% predicted in March. This aligns with the World Bank’s recent projections for the same year.
Last year, GDP experienced a strong growth rate of 2.8%.
On Wednesday, Fed economists indicated that the unemployment rate is expected to rise from 4.2% to 4.5% this year, which is slightly higher than previous estimates that suggested an average unemployment rate of 4.4%.
Additionally, the Personal Consumption Expenditures (PCE) Price Index is projected to increase by 3% annually, compared to the earlier forecast of 2.7% in March.
Currently, PCE prices have risen by 2.1% while the Consumer Price Index (CPI) indicates a 2.4% increase. An anticipated rise to 3% represents a notable jump.
The CPI saw a minor increase from April to May, yet price data does not strongly point to a rise in prices due to tariffs thus far.
The import price index remained unchanged in May.
Interestingly, prices for heavily imported items like clothing have decreased by about 1% since last year, though profit margins in that sector remain stable.
Economists suggest that this indicates businesses are absorbing the costs imposed by tariffs in this area.
Claudia Sahm, a former Fed economist, noted in an analysis that “stable margins have responded somewhat to both lower apparel import prices and consumer prices recently. The extra tariff costs, which aren’t counterbalanced by reduced import prices, seem to be taken on by businesses.”
However, it’s worth mentioning that US stock levels typically require around three months to normalize, leading many economists to believe that significant price increases could emerge this summer.
The Fed’s heightened inflation forecast supports these expectations.
Furthermore, Fed officials reiterated their commitment to continue reducing their holdings of mortgage-backed securities. They have been doing this since 2023, with total assets currently at $6.67 trillion, a figure that has been gradually decreasing in recent months. The M2 money supply in the US, which includes savings deposits and small CDs, is currently at a record high of $21.8 trillion.
