5 questions facing the Fed ahead of its rate decision

(The Hill) -- The Federal Reserve is expected to keep interest rates steady Wednesday despite growing concerns about the strength of the U.S. economy.

Measures of economic confidence spanning consumers, households and small businesses have taken a dive in recent weeks, and some performance projections are starting to follow suit.

The Organization for Economic Cooperation and Development (OECD) revised its 2025 outlook for the U.S. on Monday to 2.2 percent annual growth, down from 2.4 percent in December. Projected output for 2026 was knocked back to 1.6 percent growth from 2.1 percent.

Dips in sentiment do not guarantee that conditions will get worse, but they can be a sign of slower economic times ahead. The Fed will need to manage the narrative on the economy this week in addition to economic conditions themselves, especially with the bank set to release new projections on the economy.

Here are five questions facing the Fed ahead of its March policy decision.

What signals does the Fed give about future rate cuts?

The Fed is in the middle of a pause on its interest rate cuts, and markets fully expect the central bank to hold interbank lending rates steady this week at a range of 4.25 to 4.5 percent.

The Fed's January pause followed three rate cuts over the fourth quarter of last year that bookended a year of elevated rates prompted by the pandemic inflation. The Fed pumped the brakes on cuts after inflation crept up again during the fall and unemployment levels remained low after popping up over the summer.

The Fed has stressed its "data dependency" over this period as it has tried to stick its desired soft landing — bringing inflation down to its target rate of an annual 2-percent increase without causing a recession and throwing large numbers of people out of work.

"We're not on any preset course," Fed Chair Jerome Powell said in January. "The Committee will assess incoming data, the evolving outlook and the balance of risks."

However, as darkening sentiment related to President Donald Trump's trade war adds another variable to the Fed's policy mix, the Fed will provide more of a road map on Wednesday about where bankers expect interest rates to go.

The Fed is set to release Wednesday its first Summary of Economic Projections (SEP) — the quarterly estimates of inflation, economic growth and Fed interest rates for the next year and beyond.

Year-ahead inflation expectations increased from 4.3 percent in February to 4.9 percent in March, the highest level since November 2022, which marked "three consecutive months of unusually large increases of 0.5 percentage points or more," University of Michigan pollsters noted in their latest data release on consumer sentiment.

Expansions in the M2 money supply tapered across December and January, depository reserves are hovering around $3.2 trillion, and the Fed has been steadily shedding assets from its balance sheet for the last two years.

Where the Fed sees the economy going could resonate heavily in markets.

Where does the Fed see inflation, unemployment and growth going?

Employment, growth and inflation are currently in solid territory, but the Fed may see trends deteriorating in its Wednesday projections.

Gross domestic product (GDP) increased at an annual rate of 2.3 percent in the fourth quarter of 2024, 3.1 percent in the third quarter, and 3 percent in the second quarter.

The Atlanta Fed's GDPNow model is predicting negative growth for the first quarter of 2025, but experts think this is due to an influx of gold imports prompted by trade concerns that will not factor into the final GDP calculation.

Inflation dipped below 3 percent in the February consumer price index (CPI), and unemployment is at a relatively low 4.1 percent of the workforce. There are about 7 million people looking for a job now out of a total civilian labor force numbering more than 170 million.

Forecasters are seeing lower growth on the horizon and higher inflation — trends that the Fed will weigh in on in its summary of economic projections.

In addition to the lower growth estimate from the OECD, economists for both JPMorgan and Deutsche Bank are expecting a lower GDP forecast and high inflation.

"In the summary of economic projections (SEP) we expect that median GDP growth expectations for this year will be revised down and for core PCE inflation will be revised up," JPMorgan economist Michael Feroli wrote last week.

In December, the Fed predicted GDP growth this year of 2.1 percent, an unemployment rate of 4.3 percent, and PCE inflation of 2.5 percent.

How much do tariff and trade fears come up in the Fed's analysis?

Monetary policymakers are attempting to see the impact of a flurry of tariff announcements and quick reversals from the Trump administration on consumers and business owners.

If American importers pass the cost of the tariffs they pay onto their retail prices, it could affect inflation, which the Fed will need to consider. Retaliatory

Powell said earlier this month that the Fed is "focused on separating the signal from the noise as the outlook evolves" and may provide a clearer picture of how the economy is responding to the Trump administration's scattershot trade policy.

"Trade policy uncertainty, if it's large and persistent, can start to matter for businesses making investment decisions," Powell said in January.

The U.S. trade deficit skyrocketed in January, jumping by 34 percent to $131.4 billion — the highest level on record by a longshot. Goods imports increased $36.2 billion to $329.5 billion in January ahead of a spate of tariff announcements that came in February and March.

Does Powell address the 'recession' question?

Trump administration officials have declined to rule out the possibility of a recession as a result of their overhaul of U.S. trade posture.

"There is a period of transition because what we're doing is very big," Trump said earlier this month on the "Sunday Morning Futures" television program on the Fox News Channel cable network.

Commerce Secretary Howard Lutnick has said that Trump's policies are "worth it" even if they tip the economy into a recession.

If Powell weighs in on the recession question, he could add to the gloom that's being cast over markets and consumers or shed some sunlight on the outlook.

In fact, it's incredibly difficult to predict whether a recession is coming. Economists across the private and public sectors, including the Fed, expected the economy to slow into recession several times during the bank's rate-hiking campaign. And Trump's 2018 trade war did not spark a bout of inflation anywhere close to what happened after the pandemic.

"Consumer sentiment indexes … do not appear to be useful in forecasting consumer spending," former Fed chair Ben Bernanke and others wrote in 2011. "Consumers may be worried about the current economic situation, but it appears that their future spending is governed mainly by their incomes and financial variables, not by current consumer sentiment."

How does Trump react?

Americans' confidence in President Trump to manage the economy was a major reason he won the 2024 presidential election.

Sagging economic sentiment could be dislodging that confidence within the electorate, and Trump may respond with criticism aimed at the Fed and Powell, as he did throughout his first term.

After praising Powell last year when the Fed started cutting interest rates, Trump blasted the central bank in January when it paused its rate cuts in response to increasing inflation.

Trump later said the Fed did the right thing by pausing its rate cuts, but Fed could be in for another round of castigation from Trump.

"I'm not going to have any, any response or comment whatsoever on what the President's said," Powell said in January. It's not appropriate for me to do so."