Fed Officials Cite Uncertainty in Economic Outlook Amid Tariff Concerns

Federal Reserve officials have been frequently using the term "uncertainty" in their recent speeches, reflecting the growing concerns about the economic outlook. This trend started last week when Federal Reserve Chairman Jerome Powell mentioned the word 22 times during a press conference on March 19. Powell highlighted that the level of uncertainty surrounding the U.S. economic outlook is exceptionally high. His colleagues have echoed similar sentiments, with New York Fed President John Williams using the term 12 times in a speech titled "The Certainty of Uncertainty."

This week, Federal Reserve Governor Lael Brainard noted an "increased degree of uncertainty," while St. Louis Fed President James Bullard warned that the impact of President Trump's tariffs on inflation is shrouded in "considerable uncertainty." The Federal Reserve's quarterly economic projections, released last Wednesday, also highlighted the pervasive uncertainty among policymakers, despite predictions of two rate cuts this year. The shift in the Fed's inflation and economic growth forecasts is largely attributed to the uncertainty surrounding Trump's planned tariffs. Powell acknowledged that the tariffs have made it difficult to predict the economic trajectory accurately. Williams admitted that monetary policy is also fraught with uncertainty. Almost all Fed officials have indicated that their unemployment rate forecasts face upward risks, while inflation forecasts face downward risks.

The term "uncertainty" has also been frequently mentioned in the Fed's latest Beige Book. Richmond Fed President Thomas Barkin noted that the March Beige Book set a record for the number of times the word "uncertainty" was used, appearing 45 times. He described the current environment as one of "zero visibility, pull over to the side of the road, and turn on your hazard lights" fog. The uncertainty is not limited to the Fed. Businesses are also grappling with it. FedEx's Chief Financial Officer mentioned that the revised earnings outlook reflects the continued weakness and uncertainty in the U.S. industrial economy. Delta Air Lines attributed its downward revision of first-quarter revenue and profit expectations to "increased macroeconomic uncertainty." Consumers are also feeling the pinch, with the latest consumer confidence index dropping to its lowest level in over four years due to uncertainty surrounding Trump's policies. Inflation expectations have also risen, from 5.8% in February to 6.2% in March.

The situation is expected to become clearer on April 2, when Trump is set to announce a series of retaliatory tariffs. Some are optimistic that these tariffs might be lower than initially anticipated. However, for Fed policymakers, this could only mark the beginning of another uncertain period as they try to determine whether the additional inflationary pressures are temporary. Powell's baseline prediction is that any price increases will be transient. However, Bullard expressed caution about the assumption that the tariff hikes will have only a temporary impact on inflation. He noted that while the direct impact on price levels is expected to be short-lived, the indirect effects could have a more lasting influence on inflation. Bullard cited the example of Canadian beer, suggesting that if it were subject to a 25% tariff, U.S. consumers might switch to domestically produced Budweiser, potentially leading to price increases for the latter as demand shifts.