Attention will now shift to the US Federal Reserve.
Mar 13, 2025 11:56 IST First published on: Mar 12, 2025 at 06:50 IST
In recent weeks, fears of an economic slowdown in the US have gained traction. On Monday, the S&P 500 fell 2.7 per cent with growing investor concerns over the impact of Donald Trump’s trade policies on the US economy. The market meltdown came a day after Trump appeared not to rule out the possibility of the economy entering into a recession. In an interview on Sunday, when asked, Trump also sought to deflect the issue, saying, “I hate to predict things like that.” He added, “There is a period of transition, because what we’re doing is very big.”
However, there are some indications of an economic downturn. A few days ago the Atlanta Fed’s GDPNow model had pegged US GDP growth at -2.4 per cent in the first quarter of 2025 (seasonally adjusted annual rate). While these estimates can be volatile, Goldman Sachs has now upped the odds of a recession from 15 per cent to 20 per cent. Consumer confidence in the US is also falling – the Conference Board’s consumer confidence index fell to 98.3 in February, from 105.3 in January. Markets, firms and consumers dislike uncertainty. And, there is considerable uncertainty over how Trump’s tariff policies will play out and what will be the retaliatory impact — Trump has already gone back and forth on levying tariffs on countries. This also reflects in the economic policy uncertainty index of the Federal Reserve Bank of St. Louis which has been edging upwards. However, so far, other indicators do seem to indicate that the economy is humming along. The labour market appears to be holding up. In February, the US economy added 1,51,000 jobs, only marginally below expectations. The unemployment rate though has edged up to 4.1 per cent. Further, the New York Fed’s Nowcast model is at 2.67 per cent for the first quarter of 2025. However, the long-term implications of levying such tariffs is clear. For instance, as per the Tax Foundation, a Washington-based think tank, 25 per cent tariffs on Canada and Mexico would lower long-run GDP by 0.2 per cent.
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Attention will now shift to the US Federal Reserve. In its last meeting held in January, the Fed had voted to maintain the federal funds rate in the range of 4.25 to 4.5 per cent. However, retail inflation rose to 3 per cent in January, while core inflation was at 3.3 per cent. Data for February will be released on Wednesday. The imposition of tariffs, which will be inflationary, will make it difficult for the Fed to further ease policy rates – a policy stance that Donald Trump favours. The next meeting of the Fed, scheduled for March 18-19, will provide greater clues on the trajectory of monetary policy in the US.
