Two Diverging Outlooks: What Lies Ahead for the U.S. Economy?
In March, the Federal Reserve opted to leave interest rates unchanged at 4.25% to 4.5% for the second consecutive meeting. Most analysts anticipate this policy will remain in place during the next meeting scheduled for May 6 and 7. [1]
While there is consensus on that point, much else remains uncertain. Economic data continue to suggest calm, but market sentiment hints at potential upheaval. This article explores both views and what they could mean for investors.
The March Meeting
In both the March announcement and the press conference that followed, Chairman Jerome Powell’s stance was a familiar one: the Fed stands ready to adjust rates upward or downward if inflation spikes or the labor market weakens. His overall position reflected cautious optimism, supported by the fact that the U.S. economy was “still solid”.[2]
However, the meeting minutes reveal a more divergent picture, with officials still apparently digesting the Trump administration’s abrupt tariff actions involving Canada and Mexico. The Fed’s revised forecast reflected this uncertainty – raising the inflation forecast from 2.5% to 2.7%, and lowering expected growth from 2.1% to 1.7%, compared to the December outlook.[3]
The Fallout from Liberation Day
Following several major tariff announcements on “Liberation Day,” the administration’s strategy of applying negotiating pressure has introduced additional volatility. As in March, most of the proposed tariffs were subsequently suspended – seemingly to allow time for talks with the affected nations.[4]
This unpredictable approach appears to be a deliberate part of President Trump’s negotiation style. And judging by the markets – which reversed direction in reaction to the news – it certainly is achieving its goal.
Powell, during a Q&A session on April 16, felt compelled to comment. While he reiterated that the economy remained stable for now, he cautioned that the U.S. might soon be veering off course from achieving its dual mandate of low inflation and strong employment, due to the trade policy shifts.[5]
President Trump’s response, which included suggesting that Powell lower rates or face dismissal, followed by a softening in tone, mirrored his tariff strategy.[6]
The Data
At 4.2%, unemployment remains low by historical standards, suggesting ongoing economic health.[7] The latest inflation figures haven’t raised alarms either, though it also haven’t signaled an all-clear.
The latest headline CPI figures for February posted a notable decline, with annualized inflation falling from 2.8% to 2.4% - its lowest level since 2021.[8] However, the Fed’s preferred gauge, Core PCE, ticked up slightly to 2.8%, still above the 2% target.[9]
Broadly speaking, substantial progress has been made since 2022, but recent data indicates that momentum has somewhat stalled over the past six months.
Critics of the Trump’s trade moves, including Powell, believe that sudden tariff moves could bring the U.S. closer to stagflation, a scenario where inflation rises as growth weakens. This is one of the most difficult challenges for the Fed.
Adding uncertainty around immigration, fiscal policy, and regulation, we now find ourselves in the current situation: significant market anxiety that could easily turn into real economic strain.
Conclusion
Successful investing often depends on knowing when to follow the crowd and when to stay the course. In periods of market stress, it’s behavior, not headlines, that tends to determine outcomes.
It’s tempting to respond to alarming news or bold commentary, but it’s also worth remembering that far fewer people truly understand the situation than those who claim to. No one can predict geopolitics with perfect accuracy.
When the picture is unclear, seeking certainty can be counterproductive. Exercising patience – while difficult – is often the more reliable strategy, particularly when anchored by a well-structured, long-term financial plan.
Uncertain times reinforce the value of a diversified portfolio, including exposure to less correlated asset classes, to help weather whatever lies ahead.
[7] Bureau of Labor Statistics
