Fed Projections See an Economy Dramatically Reset by Trump’s Election Not long ago, Federal Reserve officials presumed that 2025 would simply be about getting to the soft landing

(…) The latest projections point to the prospect that tariffs covering a swath of goods and materials will send up prices while sapping investment, sentiment and growth, at least in the short run. 

“We now have inflation coming in from an exogenous source, but the underlying inflationary picture before that was basically 2½% inflation, 2% growth and 4% unemployment,” said Fed Chair Jerome Powell on Wednesday.

Officials projected weaker growth, higher unemployment and higher inflation than they had anticipated in December. Moreover, nearly all officials judged that if their forecasts were to be proven wrong, it would be in the direction of even softer growth, more joblessness and firmer price growth. 

A combination of stagnant growth and higher prices, sometimes called stagflation, could make it harder for the Fed to cut interest rates this year to pre-empt any slowdown. (…)

Stocks rallied because a majority of officials penciled in two rate cuts for this year, the same as in December. Powell held out, with low conviction, the prospect that “tariff inflation” might not demand any meaningful change in the Fed’s interest-rate posture. (…)

The number of officials who penciled in fewer cuts compared with December went up. And Powell conceded that a “highly uncertain environment” led some officials to simply not fuss over big changes to the rate outlook. “There is a level of inertia where you just say, maybe I’ll stay where I am,” he said. (…)

On Wednesday, Powell allowed for the possibility that such a “transitory” diagnosis could be appropriate “in the case of tariff inflation.” (…)

“You have to figure out how much is transitory and how much is likely to be perpetuated by these second-round effects, and there is no clean way of doing that.”

Officials could be hard-pressed to declare price increases from tariffs as temporary if they set in motion a reordering of global production processes that takes years to play out. (…)

“You’re basically saying, ‘Look, we have a potential inflation problem here. We’re going to be focused on that, and when we get more evidence about what’s happening on the growth side, we’re willing to react at that point—and not before,’” she said. “No one would like to have to do it that way. But it may be that in this environment, that’s what they’re going to have to do.”

Policy makers now expect GDP growth of 1.7% this year, down from the 2.1% they estimated in December, and they think their preferred measure of core inflation will hover at 2.8% instead of 2.5% as they predicted three months ago.

Bloomberg:

Powell Downplays Growing Risks, Sees Tariff Impact as Transitory

“As I’ve mentioned, it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us, if it’s transitory,” Powell said.

He called that scenario the “base case,” but then hedged, saying officials “really can’t know” if the effect will be temporary. (…)

Asked about sagging sentiment from businesses and consumers, Powell said “hard data” show the economy is still solid. The Fed chief also went on to express confidence that long-run inflation expectations remain well anchored, despite a series of readings from a University of Michigan survey calling that into question. The most recent report showed consumers expect prices to rise at an annual rate of 3.9% over the next five to 10 years, the highest in more than three decades.

Yet Powell largely dismissed the data, calling it “an outlier” more than once. (…)

He also did not seem to care of Tuesday’s Empire State surveys. Demand and expectations in both manufacturing and services were down big time with rising prices.

Here’s another one by the Atlanta Fed:

Business Inflation Expectations Increased to 2.5 Percent

The Fed Is Clueless, Too. And That’s OK

“Never be embarrassed to admit ignorance,” I was told on my first day of work as a journalist. “It’s the first rule of journalism.” I’ve never forgotten that, and the same applies to central bankers, as the Federal Reserve’s Jerome Powell made clear when he repeatedly told the press that he didn’t know what was going to happen with US trade policy, or what effect it would have on the economy. (…)

Markets also liked his response to a question about the sharp rise in consumer inflation expectations recently flagged by the University of Michigan’s regular survey, which he dismissed as an “outlier.” That implies A) that the Fed isn’t too worried about rising inflation expectations yet, and B) that they haven’t been looking at all the available surveys:

Whether this was willful denial or a belief that tariffs are confusing the issue so much that surveys can’t be trusted, it bolstered the market’s growing confidence that the Fed will cut rates at least twice this year — probably three times. The implicit path for fed funds predicted by the futures market (according to Bloomberg’s trusty World Interest Rate Probabilities function) has shifted significantly since Trump’s inauguration:

(…) Meanwhile, the dot plot, in which each committee member predicts the future course of the fed funds rate, shows a Fed losing confidence in cuts. Using my customary lo-fi approach of cutting and pasting from the press release using Paint, this is how the projections changed between December and March for interest rates at the end of this year:

(…) the number who expect to cut further has dropped to two from five, while those expecting only one cut or none has doubled from four to eight. The mean expected end-2025 rate has risen from 3.63% to 4.0%. Effectively, that’s 1½ cuts that the governors now think they won’t make — even as the market still pencils in 3.63%. In this case, the mean seems plainly more useful than the median. The committee still expects to cut twice, but the risks have emphatically moved to cutting less rather than more. (…)

These central bankers are honestly admitting to rising uncertainty and risks of stagflation, while implicitly promising to try not to break the economy. It’s hard to see this as a significant turning point that should bring people into risk assets. 

One final point for the administration: Tariffs may be a useful tool in negotiations, but threats aren’t costless. Amping up the uncertainty has the real-world consequence of deterring people from taking risks. There are limits to how far trade policy can continue to be conducted this way.

• Here are the median numbers as presented in the Fed’s summary, with arrows added by FT’s Unhedged. There is a word for this sort of thing, and it is a bad word: stagflation.

Ed Yardeni:

Federal Reserve Chair Jerome Powell used the word “uncertainty” 16 times in his press conference today. We sympathize. At the outset, it’s impossible to know what tariffs will be imposed by the US on April 2., on which countries, and for how long. When the specifics are revealed, it will still be difficult to forecast their impact on economic growth and inflation in the US and around the world. Another known unknown is the response of America’s trading partners to reciprocal tariffs. Will they lead to negotiated reciprocal reductions in tariffs or to escalating retaliatory tariffs? (…)

In his presser today, Powell repeatedly said that the Fed was in no hurry to lower rates. To us, the operative word is “lower,” suggesting that monetary policy continues to have a dovish bent. While we remain in the none-and-done camp for the rest of the year, we acknowledge that the FFR would be lowered readily if the unemployment rate started to increase quickly. The FOMC’s median projection is that the unemployment rate will finish the year at 4.4%, up from 4.3% in last December’s projection. (…)

Investors are glad to know that the Fed Put remains on standby if needed to support the economy. (…)

Nearly all FOMC participants agreed that the unemployment rate and GDP growth will probably get worse. (…)

A real possibility is that the Fed might not be willing to cut interest rates at all if inflation expectations become unanchored. Consumers’ inflation expectations have been rising recently, and the Atlanta Fed’s measure of business inflation expectations rose from 2.0% in December to 2.5% today. Import price inflation, which doesn’t include tariffs, also increased in February.

The bond market is signaling that inflation from tariffs is likely to be transitory. We agree because unit labor costs inflation, which is the underlying source of inflation in a services economy like ours, should remain contained around 2.0% if productivity growth remains strong, as we expect.

Yes, we’ll get the Fed put if the economy weakens, which seems to be most people’s base case.

But what if inflation is not transitory? How will the Fed deal with stagflation, slowing growth and rising inflation?

Fiera Capital has now made “Inflation Revival” its main scenario with a 55% probability. “Stagflation” is scenario 2 with 25% odds. That’s 80% probability that inflation is 3.0% and above.

And shouldn’t we discount productivity growth for a while given the chaos in supply chains? Read this NYT Boeing story.

TARIFFS WATCH: In the Real World

Trump’s Tariffs Could Deal a Blow to Boeing and the Aerospace Industry

Boeing is the kind of manufacturer — one that exports billions of dollars of goods — that President Trump says he wants to protect and nurture.

But his tariffs could have the opposite effect on the company’s suppliers. (…)

Duties on aluminum and steel, two of the most important raw materials used in aircraft, are expected to raise manufacturing costs. But the industry is far more concerned by tariffs that take effect on goods from Canada and Mexico next month, which could disrupt the highly integrated North American supply chain.

“These tariffs are particularly fraught for an industry like aerospace that has been duty-free for decades,” said Bruce Hirsh, a trade policy expert at Capitol Counsel, a lobbying firm in Washington, which has aerospace clients. “Parts are coming from everywhere.”

Aerospace experts say the industry is an example of U.S. manufacturing prowess. It offers well-paying jobs and has produced one of the largest trade surpluses of any industry for years. Aerospace is expected to export about $125 billion this year, according to IBISWorld, second only to oil and gas. (…)

After months of turmoil, including a nearly two-month strike, Boeing has steadily increased production of the Max, its best-selling jet, and other planes. But the tariffs could hurt the companies that supply it and other aerospace manufacturers. Aluminum makes up about three-fourths of the contents of the Max. Steel accounts for a much smaller but still substantial share.

The direct effects of the tariffs on Boeing will be limited, Brian West, the company’s chief financial officer, said at an investor conference on Wednesday. The company has a lot of inventory on hand and the company’s spending is already overwhelmingly concentrated in the United States. In addition, a rise in metal prices would amount to a less than 1 percent increase in the costs of making planes, he said.

But the tariffs could take a toll on companies further down the aerospace supply chain, which have struggled for years with material and labor shortages.

“What we do worry about is availability of parts because this is a broad complicated supply chain and people have different levels of exposure to it,” Mr. West said.

In all, the tariffs could raise costs for the aerospace industry by about $5 billion annually, said Kevin Michaels, a managing director of AeroDynamic Advisory, a consulting firm. A vast majority of that would come from the tariff on goods from Canada and Mexico. And the threat of a trade war would only compound the consequences.

“Not only are the country tariffs bigger, but countries can retaliate,” Mr. Michaels said. “And, boy, is Canada mad.” (…)

Parts of Boeing’s 787 and 777 jets are built in Canada, which is also home to CAE, a leading manufacturer of flight simulators. Pratt & Whitney makes engines for helicopters and other aircraft in Quebec.

Mexico is also home to many suppliers, big and small. Collins Aerospace, Honeywell Aerospace and GE Aerospace design or produce components for commercial and business jets there.

If tariffs are imposed, analysts said, moving that production to the United States would be difficult, if not impossible.

“That’s going to take an awful long time to happen, if in fact it ever does,” Jerrold Lundquist, an industry consultant, said. “There’s fundamental economics as to why that supply chain is distributed in the first place. It’s usually labor costs, but also material availability and things like that.”

The industry operates on long time horizons — planes take years to design and months to make and are typically used for decades — so decisions to move operations are not made lightly. There aren’t enough skilled aerospace workers in the United States, and suppliers have struggled for years to hire enough workers.

In a report to Congress in November, a coalition representing the industry, workers and safety experts concluded that the “aerospace supply chain is vulnerable to labor shortages, obstacles in critical materials and the health of supporting infrastructure.”

Even the threat of an escalation in trade tensions is hurting aerospace manufacturers, industry experts said.

“The strategic decisions in a lot of cases are frozen as a result of this,” Mr. Michaels said.

• Copper price hits $10,000 on US tariff fears

That is the LME price. “New York copper traders are also paying a record premium over the price in London to buy copper, as they try to secure supply ahead of possible US tariffs.” (…)

CONSUMER WATCH

Data from the Fed shows that households’ ability to come up with $2,000 for an emergency expense within the next month is at the lowest level since the survey started in Q4 of 2015. Taking into account that the CPI level today is 35% higher than in 2015, the situation is even worse.

Sources: SCE, Federal Reserve Bank of New York, Haver Analytics, Apollo Chief Economist

Florida Explores Ditching Property Tax as Home Prices Soar State lawmakers have filed a raft of bills aimed at reducing property taxes—or gutting them altogether

(…) The property-tax system is among the top issues under discussion in the legislative session that began this month. The attempted overhaul represents one of the most serious efforts ever. A full repeal would be the first such move in the nation. 

Florida’s lawmakers have filed dozens of bills on the issue, ranging from proposals to end property taxes to smaller tweaks to give targeted help to homeowners. (…)

Revolts against property taxes have erupted elsewhere in recent months as homeowners’ tax bills have risen alongside home values. Property values in the U.S. increased 27%, adjusted for inflation, between January 2020 and July 2024, according to the Tax Foundation, a think tank. (…)

A number of states including Wyoming, Kansas and Montana are weighing significant property-tax limitations, he said. In November, voters in North Dakota rejected a ballot measure that would have eliminated property taxes. (…)

Florida’s effective property-tax rate ranked 28th nationally in 2023, according to an analysis by the Tax Foundation. But as real-estate values have surged, the total amount levied has roughly doubled over the past decade, reaching more than $55 billion in the 2024-25 fiscal year, according to a recent presentation by Azhar Khan, staff director of the Florida Senate’s finance and tax committee. (…)

Among the legislative bills filed for the current session in Tallahassee are several that would increase exemptions that reduce the taxable value of a property. Included would be the homestead exemption, which applies to a home used as a primary residence. (…)

In Florida, which has no personal income tax, property taxes play a significant role in paying for schools, police, parks and other services. They account for 18% of county revenue, 17% of municipal revenue and 50% to 60% of school-district revenue, according to a recent report by the Florida Policy Institute, a nonprofit focused on economic mobility. If property taxes were eliminated, the sales tax would have to be at least doubled, to 12%, to make up for the lost revenue, the report said. (…)

In his State of the State speech, DeSantis ruled out raising any state taxes to replace property taxes. He later suggested that getting rid of waste and excessive spending by local governments would reduce the amount of revenue they need. (…)

HARD SOFT DATA

CEOs won’t say it face to face but they are fearless with anonymous surveys:

Empire State Manufacturing Survey

Business activity dropped significantly in New York State in March, according to firms responding to the Empire State Manufacturing Survey. The headline general business conditions index fell twenty-six points to -20.0.

The new orders index fell twenty-six points to -14.9.

 

The index for number of employees held steady at -4.1, and the average workweek index was -2.5, pointing to a slight decline in both employment and hours worked.

Both price indexes climbed for a third consecutive month. The prices paid index rose five points to 44.9, its highest level in more than two years, and the prices received index rose three points to 22.4, its highest reading since May 2023.

Firms continued to grow less optimistic about the outlook. After dropping fifteen points last month, the index for future business activity fell another ten points to 12.7. Capital spending plans remained soft. Input price increases are expected to remain significant.

High inventories and declining orders are not a good recipe. The above is for manufacturing. What about services?

• Business Leaders Survey A monthly survey of service firms in New York State, northern New Jersey and southwestern Connecticut

Business activity fell at a substantial pace in the New York-Northern New Jersey region, according to the March survey. The headline business activity index fell nine points to -19.3. Nineteen percent of respondents reported that conditions improved over the month while 38 percent said that conditions worsened. The business climate index dropped sixteen points to -51.7, its lowest level in four years, with nearly 60 percent of respondents saying that the business climate was worse than normal.

The employment index was little changed at -4.7, indicating that employment levels continued to decline slightly. The wages index fell six points to 35.8, indicating that wage increases moderated somewhat.

The prices paid index moved up eight points to 58.8, its highest level in nearly two years, a sign that input price increases picked up. After rising eight points last month, the prices received index held steady at 28.7. The supply availability index was -2.8, suggesting supply availability was slightly lower.

The index for future business activity plunged twenty-five points to -3.3, its first negative reading since 2023, suggesting that firms on the whole do not expect activity to increase in the months ahead.

The index for the future business climate fell twenty-three points to -26.9, part of a cumulative decline of forty points over the past two months, suggesting the business climate is expected to remain worse than normal.

The future employment index fell to its lowest level since December 2020, with negligible employment growth expected over the next six months. The future supply availability index remained firmly below zero at -18.7, with about 31 percent of firms expecting supply availability to be worse in six months. Capital spending edged down

Let’s see how the FOMC deals with such hard soft data. Remember that Powell said “the economy’s fine” two weeks ago.

TARIFFS WATCH: In the Real World

• Last fall, Molson Hart ordered $100,000 worth of stuffed animals from China to sell through his Texas-based company, Viahart Educational Toy Co. In January, the toys were loaded onto ships for voyages across the Pacific Ocean and through the Panama Canal. In February and again in March, President Trump imposed new tariffs on China. The toys arrived in Houston on March 12, days after the 20% tariff took effect. The cost to Hart: an additional $20,000.
• Zach Frew, the co-founder of Boston-based Grounded Labs, contracted to place a container of his company’s devices, which make designs using sand art, on a ship leaving China on Jan. 29. But his shipment was bumped to a different ship at the last minute, a common occurrence in ocean shipping that usually adds time but not cost. Instead, this time, the container ended up departing Feb. 5 at an extra cost of nearly $23,000, as the products inside were by then subject to Trump’s 10% duty on all Chinese imports. Frew now has two more containers on the way that face estimated additional tariffs of $54,000 after the 20% levy kicked in. “It’s investments that we can’t make in the business,” he said.
• Jordan Dewart, president of Mexico operations for logistics provider Redwood Logistics, said one auto-parts shipment was hit with a bill for about $50,000 during the brief period the 25% tariff on goods from Mexico was in effect after the trucker carrying the load was delayed by a flat tire.
• “It’s going to cost me an additional $850,000 in additional tariffs that I did not plan,” said Gregorich, who noted that other levies could be placed on the shipments depending how his products are classified. “That’s a lot of capital it’s eating up.” Gregorich said he plans to raise prices to help cover the costs.
• “I was hoarding,” Shugar said. “I thought, I need to buy this because there’s going to be a tariff coming.” He said he loaded up on black fabric for tuxedo bow ties, bestselling solids like red and navy, and florals for the spring wedding season. He avoided tariffs on that shipment. But he now has less cash on hand to invest in his business. “My eye’s off the ball. I can’t focus on growth,” Shugar said. “It is chaotic for us as a small business.”
• Millions of dollars’ worth of wine is already paid for and on U.S.-bound ships, Fass says.
  If those imports are suddenly hit with 200% tariffs on arrival, most importers simply won’t have the money to pay what they owe.

• According to Bank of America aggregated credit and debit card data, small businesses are slowing their card spending across the board. Notably, for small manufacturing firms with annual revenues of <$500K, their payments growth fell 5.7% year-over-year (YoY) in February. Travel and hardware had a sharp deterioration in the past month, possibly as business looked to cut costs amid weakening demand and growing uncertainty. Across four major industries, manufacturing, finance and construction payments growth per small business client was negative in February while retail was positive.

• Buy Canadian movement starts to take a sizable bite out of U.S. business

(…) U.S. tour operators are reporting booking declines of as much as 85 per cent, while American distilleries are losing major deals. Meanwhile, Canadian grocers are posting a bump in domestic product sales of up to 10 per cent. (…)

“To use some of the words I hear from tour company members of the National Tour Association, the drop-off is ‘astronomical’ when speaking about Canadians booking group travel to the United States,” said Catherine Prather, president of the Kentucky-based organization, which specializes in group tours.

One National Tour Association member operator reported just two bookings for U.S. tours in the past two weeks compared to 39 bookings during the same period in 2024, she said. Another Canadian operator, with 85 per cent of their business focused on tours to the U.S., had to scrap every U.S. departure for March, April and May due to client cancellations.

Ms. Prather said Canadian operators and hospitality businesses represent 7 per cent of NTA’s membership, with many focusing a chunk of their business on tours to the U.S. “One of those tour operators has just responded with the latest cancellations – his business will be down 75 per cent this year,” she said. (…)

Traffic across some major border crossings in tourism states such as New York has dropped by 12 per cent in the first two weeks of February alone, said Mr. Fram. (…)

The U.S. Travel Association warned in February that even a 10 per cent drop in Canadian visitors would lead to more than $2.1-billion in spending losses and a threat to 14,000 jobs. (…)

Sobeys Inc. parent, Empire Company Ltd., also reported a spike in Canadian product sales in its last quarterly results while purchases of U.S. goods as a percentage of total sales were “rapidly dropping,” according to CEO Michael Medline. (…)

Pierre Cléroux, vice-president of research and chief economist at the Business Development Bank of Canada, told The Globe and Mail that if every Canadian household redirected $25 a week from foreign products to Canadian ones, it would boost GDP by 0.7 per cent and create 60,000 jobs.

According to his modelling, if Canadians also cut international travel by 10 per cent and spent that money domestically, the combined effect would raise GDP by 1 per cent and create 74,000 jobs. (…)

• Germany’s Defense Splurge Set to Favor European Companies

• U.S. trade actions have raised questions about validity of USMCA, Carney says “By applying unilateral tariffs for a variety of specious reasons, Trump has violated the very premises of the USMCA,”

BTW:

Import prices rose 0.4% in February, above expectations. Import prices ex-petroleum also rose 0.4%, above expectations. Prices for imports from China rose 0.5 percent in February, after rising 0.2 percent in January. The February advance was the largest 1-month increase since a 0.5-percent rise in March 2022.

Goldman estimates that the core PCE price index rose 0.34% in February (vs. our expectation of 0.29% prior to import prices data), corresponding to a year-over-year rate of +2.75%. Additionally, we expect that the headline PCE price index increased 0.30% in February, or increased 2.50% from a year earlier.

FLOWS MATTER

The Mag-7 companies may be the least fundamentally impacted by the tariff chaos. Yet they tanked the most.

The rotation out of US and into foreign stocks suggests that global investors have been mostly selling the Magnificent-7. Rather than buying the S&P 493 (as we’d expected), they’ve been buying foreign stocks with lower valuation multiples, especially Chinese technology and German industrial stocks (chart). In addition, thanks to Trump Tariff Turmoil 2.0, recession fears are more widespread in the US than in China and Germany, because the latter two are stimulating their economies.

The forward P/E of the US MSCI stock price index still well exceeds those of the other major MSCI stock price indexes. (Ed Yardeni)

Source: BofA Global Research

• “The extraordinary returns for the US equity market over the past two years has really been driven to a meaningful amount by the seven large companies that go by the sobriquet the Magnificent Seven. Unfortunately from a portfolio management perspective, it’s been Maleficent Seven. It’s been the real source of pain in the market this year.” (Goldman Sachs’ David Kostin)
• “There have been significant inflows from abroad into US equity markets, and foreign investors are now significantly overweight US equities. Combined with the dollar’s decline and the ongoing overvaluation of the Magnificent 7, the downside risks to the S&P 500 as a result of foreigners selling are significant.” (Apollo’s Torsten Slok)