The recent Federal Reserve meeting revealed that inflation is expected to rise above 3% this year, driven by uncertainties surrounding President Donald Trump’s trade policies and escalating geopolitical risks. The core personal consumption expenditures price index, which excludes food and energy, is projected to increase at a rate of 3.1% in 2025, up from the previous forecast of 2.8% in March.
In April, the PCE price index stood at 2.1%, matching its lowest level since February 2021. Excluding food and energy, core PCE was at 2.5%, a metric that Fed officials consider a better indicator of long-term trends. Additionally, economic growth is expected to slow down, with GDP projected to expand by just 1.4% this year, lower than the 1.7% pace forecasted in March.
Federal Reserve Chair Jerome Powell highlighted that the recent increase in inflation expectations could be attributed to tariffs. He emphasized that the cost of tariffs will eventually be passed down the supply chain, ultimately impacting consumers. The Fed has been cautious about lowering interest rates due to concerns that Trump’s tariffs could reignite inflation in the coming months. The ongoing conflict between Israel and Iran also presents a wildcard in monetary policy decisions, as high oil prices could hinder the Fed from easing policy.
Despite the reluctance to lower rates, the dot plot revealed that officials anticipate the benchmark lending rate to decrease to 3.9% by the end of 2025, signaling two rate cuts later this year. While seven out of the 19 participants preferred no cuts in 2025, there is a consensus for fewer cuts in 2026 and 2027.
Overall, the Fed’s latest targets reflect a cautious approach to monetary policy in light of economic uncertainties and geopolitical risks. As inflation expectations rise and economic growth slows, the Federal Reserve faces a delicate balancing act in navigating the complex landscape of trade policies and global tensions.
