US Fed expects tariff-led inflation to hit 3.5%-4%, GDP to slide below 1%: ‘Unusually wide range of outcomes…'

US Fed on Trump tariffs: New York Federal Reserve President John Williams has said the Trump administration's current trade policies will accelerate inflation this year, while adding that it is critical for the US central bank to prevent longer-run expectations of price pressures from becoming unbound.

"It's hard to know with any precision how the economy will evolve," Williams said as part of public remarks delivered to the Puerto Rico Chamber of Commerce. "Given the uncertain effects of the tariffs and other policy changes, there is an unusually wide range of outcomes that could transpire."

In light of that uncertainty tied to US President Donald Trump's moves to impose hefty import taxes on a wide range of trading partners, the economy's strong start to the year is likely to give way toward something less favorable in 2025, Williams said. The US Fed will need to watch the data carefully during this period to know how to react with monetary policy, he said.

US Fed's Williams eyes inflation to hit 3.5-4%, GDP below 1%

Williams said he expects tariffs to push inflation up to 3.5 per cent and four per cent this year, which would represent a marked rise in price pressures from the current level of the Personal Consumption Expenditures Price Index, which was 2.5 per cent on a year-over-year basis in February. The PCE is the US Fed's main inflation gauge.

"Given the combination of the slowdown in labor force growth due to reduced immigration and the combined effects of uncertainty and tariffs, I now expect real (gross domestic product) growth will slow considerably from last year's pace," and will come in "somewhat below one per cent," while the jobless rate should rise from its current level of 4.2 per cent to between 4.5 per cent and five per cent.

Williams noted that he remains committed to getting inflation back to the Fed's two per cent target. He said while short-term inflation expectations have risen, longer ones have remained in check, and it is critical that the Fed keep it that way.

US Federal Reserve Governor Adriana Kugler has said that some of the recent rise in goods and market-services inflation in the country may be "anticipatory" of the effect of the Trump administration's reciprocal tariffs, adding that the US Fed's focus should be on keeping inflation in check.

"It should be a priority to make sure that inflation doesn't move up," said Kugler. She noted that short-term inflation expectations have risen but longer-term they remain well-anchored. “We want to keep it that way. We, colleagues at the Fed, are very committed still to our two per cent target and want to keep inflation expectations well anchored, which should be a priority now.”

US Fed current policy rate

The US Fed has kept its policy rate in the 4.25 per cent-4.50 per cent range since December, when it delivered the last of a series of interest-rate cuts aimed at making sure that monetary policy was not overly restrictive in the face of then-falling inflation.

Since the beginning of the year, the progress towards the US Fed's two per cent inflation target has been barely detectable, and measures of the underlying US inflation have risen, pushed up by core goods prices and market-services inflation amid tariff pressures after Donald Trump's term as President.