Not even the Fed knows what's next

Politico

20-03-2025

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Quick Fix
Progress on inflation has stalled. The Federal Reserve's growth expectations for 2025 have faded and fewer central bank policymakers think that they'll be able to stimulate the economy with two more interest rate cuts this year.
How much confidence does Fed Chair Jerome Powell have in those projections?
'I don't know anyone who has a lot of confidence in their forecast,' the most powerful central banker in the world told reporters on Wednesday.
Powell's comments, which followed the Fed's decision to hold short-term interest rates at their current level of 4.25 percent to 4.5 percent, underscore just how much President Donald Trump's administration has thrown central bankers, Wall Street leaders and investors into confusion.
'Forecasting is always really, really hard. And in the current situation, uncertainty is remarkably high,' Powell said, later adding that the central bank is 'well-positioned to wait for further clarity.'
To crib a phrase from investor Richard Bernstein, certainty is now a scarcity in markets. The size and scope of new 'reciprocal' tariffs set to hit major trading partners on April 2 are still basically unknown, though they may ultimately affect trillions of dollars in imports. Wall Street investors and policy analysts are parsing statements from Commerce Secretary Howard Lutnick, Treasury Secretary Scott Bessent and National Economic Council Director Kevin Hassett for forward guidance, but their collective commentary has done little to calm the markets.
What's more, it's unclear how Trump's plans to deport millions of immigrants will impact a domestic labor market that defied gravity during the Fed's post-pandemic rate cycle. GOP leaders in Congress haven't agreed to a legislative framework for Trump's tax and spending priorities. The cuts from Elon Musk's Department of Government Efficiency are difficult to quantify and any ongoing deregulation hasn't resonated with investors.
It's the 'net effects' of Trump's agenda that will ultimately shape the economy and interest rates, Powell said.
The danger, of course, is that Powell & Co. won't have a handle on those net effects until it's too late. Memories of Powell's claims that post-pandemic inflation would likely prove 'transitory' remain fresh. And even though the dour mood affecting traders and consumers hasn't resulted in an economic slowdown or price surges, analysts believe that both pose growing threats. (Hence the speculation that stagflation, Beelzebub for monetary policymakers, may be making a comeback.)
To be clear, stagflation is not imminent or a foregone conclusion. The economy remains on relatively stable footing, even though consumer confidence and growth projections have clearly worsened. The stock market bounced on Powell's commentary that the price effects of new trade policies may be short-lived.
The Fed now expects prices in core sectors of the economy to climb by 2.8 percent through the end of the year, a meaningful jump from the 2.5 percent estimated in December. Similarly, its growth estimate for 2025 dropped from 2.1 percent to 1.7 percent.
How much conviction should you have in that forecast? Ask Powell.
IT'S THURSDAY — Huge tip of the cap to Victoria Guida for surviving another Fed day. And as always, send econ policy thoughts, Wall Street tips, personnel moves and general thoughts to Sam at [e-mail].
Driving the Day
World Bank President Ajay Banga speaks at the Economic Club of Washington at 8 a.m. … Existing home sales data for February will be out at 10 a.m. … The American Enterprise Institute for Public Policy Research hosts a discussion on homesteading at 10 a.m. … The Peterson Institute for International Economics hosts a virtual discussion at 10:30 a.m. on 'The EU's New Era of Trade and Geopolitical Challenges'
The day in tariffs — Trump officials are 'laying the groundwork for an escalation in global economic hostilities,' WaPo's Jeff Stein and David Lynch reported on Wednesday. 'A person familiar with internal planning, speaking on the condition of anonymity to reflect private deliberations, confirmed administration officials are preparing tariffs on 'trillions' of dollars in imports.'
— Meanwhile, in an appearance on Fox Business, Hassett signaled that many countries could emerge unscathed on April 2, per Doug Palmer.
Welcome news for the Big Banks — In an interview on the 'All In' podcast published Wednesday, Bessent suggested that U.S. government debt should be carved out of the supplementary leverage ratio, Victoria reports. The Treasury secretary touted it as a way to lower interest costs.
Big trouble for big law — Trump's sanctioning of major law firms Paul Weiss and Perkins Coie has forced Washington's white shoe firms to grapple with a major dilemma, 'keep their heads down and avoid cases that may pit them against the administration, or continue representing clients that might anger a president increasingly willing to use his power to seek vengeance,' reports Daniel Barnes.
At the regulators
If you say so — Ripple CEO Brad Garlinghouse said the Securities and Exchange Commission is backing down from its appeal of a 2023 decision in federal court that found that some sales of the company's XRP token were illegal under the securities laws while others were not. While the SEC declined to comment, the agency's decision to drop its appeal would represent a further de-escalation of its years-long legal battle against industry heavyweights, Declan Harty reports.
— The venture capital giant Sequoia Capital is closing its Washington office and policy team, Fortune's Jessica Matthews reports.
Big challenge for antitrust — Reams of consumer data held by businesses can shape corporate strategy, merger activity, pricing and — in financial services — credit decisions. But regulators that police merger activity aren't applying a uniform standard to how that data can affect market competition — potentially to the detriment of consumers, Linda Jeng, Jon Frost, Elisabeth Noble and Chris Brummer wrote in a new working paper published by the Bank for International Settlements. Critically, authorities like the Federal Trade Commission and the Department of Justice's Antitrust Division, 'may not effectively accommodate issues relating to large data sets at merging firms, particularly those that may be complementary and used for competitive advantage across multiple business and product lines.'
Very odd — From Katy O'Donnell: 'An Elon Musk ally resigned his position on Fannie Mae's board of directors on Tuesday, just one day after he was named to the board.'
— The board upheaval unleashed by newly confirmed Federal Housing Finance Agency Director Bill Pulte is raising doubts that the Trump's administration will move quickly with the expected privatization of Fannie Mae and Freddie Mac, Katy reports.
The Economy
First in MM: The economic outlook is grim, regardless of your media diet — New polling from the Democratic public affairs firm Global Strategy Group found that voters are increasingly bearish on how Trump's policies will affect the economy. While those results echo the pessimism reflected in other consumer surveys and nonpartisan polling, GSG also found that outlooks are fading regardless of media diet.
Trump supporters are less likely to consume news from national publications or television. But mounting concerns about personal finances and inflation are breaking through regardless of how much faith they place in traditional media, according to the survey. In other words, 'personal experiences are shaping voters' perceptions more than the media filter that they're operating in,' Katie Drapcho, a vice president for research at GSG, told MM.
'What that tells us is that the economy is unique relative to other political issues,' she said.
'That does provide an opening for Democrats to engage on these issues because, regardless of where people are getting their information, they're sharing the same experiences and concerns when it comes to the economy.'
At the border — Officials are cracking down on Americans attempting to sneak eggs across the border, CBC's Natalie Stechyson reports. Seizures are up by 116 percent compared to January and February of last year.