With uncertainty comes growing economic risk for the Fed to weigh

Business and consumer sentiment have dropped, some measures of manufacturing have weakened, and the stock prices that contributed to record household wealth just as Trump was about to return to
Employment growth has largely persisted, and inflation has continued to moderate, according to the most recent data, but tariffs imposed by the U.S. and retaliatory actions from trading partners raise the chance that could reverse.
It's a lot to take in and next week Federal Reserve officials - the most important U.S. economic decisionmakers outside of the new administration - gather in
Fed Chair
A recent Reuters poll found near unanimity among economists that near-term recession risks have risen, while some top economic forecasters say slowing growth may be accompanied by still rising prices.
The two together could force Powell and his colleagues into difficult choices between supporting the economy and jobs with interest rate cuts, or keeping rates higher to ensure inflation and inflation expectations remain controlled.
'DETOX'
The Fed is expected to keep borrowing costs steady at its
In his last remarks ahead of the meeting, Powell gave "guidance on sticky inflation, inflation falling faster than expected, and an unexpected weakening of the labor market,"
The possibility of conflict between the Fed's 2% inflation target and maximum employment goals has crept into policymaker speeches as the breadth of Trump's tariff plans raised concerns they might deliver both an extensive price shock and, just as important for the Fed, a shock to public expectations.
Coupled with other actions that could slow growth, such as the firing of federal workers and the cancellation of federal contracts, Trump's first days have unleashed a contradictory set of forces that leave the Fed to assess whether the things that could increase prices or the ones that could slow growth and employment come to dominate.
Treasury Secretary
WORRYING SIGNS
The blow to markets and sentiment has been significant.
The S&P 500 is down over 10% from last month's record, well below where it was when Trump's election set off a bout of optimism among businesses that he would keep a strong economy on track.
Rates on short-term Treasury securities have risen above long-term yields, with investors accepting less return on a 10-year note than for a three-month bill, an 'inversion' of the yield curve that sometimes signals a loss of confidence in the economy over the short term.
While Fed officials have been reluctant to put much weight on it, the gap between the 10-year and 3-month Treasuries was flagged in earlier Fed research as the most useful spread to monitor.
Surveys have also shown sentiment dropping among small businesses, while a recent release from software firm Intuit, based on data from businesses using their payroll software, showed small firms shedding jobs in January.
The headline data, typically published in one-month intervals with a lag, hasn't shown as much recent movement, with much of it dating to days near the start of Trump's still less than two-month old term.
Firms added 151,000 jobs in February, with the unemployment rate still at a relatively low 4.1%, though the survey that produced those estimates was too early to catch the likely building impact of layoffs of government workers and at firms or institutions that have seen their federal contracts threatened or canceled.
GOLDMAN GROWTH DOWNGRADE
Inflation continued to moderate, with Fed officials still on the whole confident it would continue to ease toward their 2% target.
But consumption also dipped unexpectedly in January, and consumer-facing companies, from airlines to retail giants like Target, are warning of wary consumers and a flat sales outlook.
Meanwhile indexes that try to track uncertainty, which can weigh on spending decisions by consumers and businesses, spiked to levels not seen since the COVID-19 pandemic.
In a recent forecast update, Goldman Sachs economist Jan Hatzius knocked his 2025 growth outlook for the U.S. from 2.4% to 1.7%, and noted the downgrade had nothing to do with recent economic data that has remained at least "decent" if not supportive of growth.
"The reason for the downgrade is that our trade policy assumptions have become considerably more adverse," given the size of Trump's tariffs and his apparent intent to extend them globally. In addition, the administration now appeared to be "managing expectations towards tariff-induced near-term economic weakness."
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