The Fed: Projections on the Economy, Inflation and the Troubling Response

By SBE Council at 19 March, 2025, 8:24 pm

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by Raymond J. Keating -

Few were surprised that the Federal Reserve decided to leave short-term interest rates exactly where they were in its announcement on monetary policy on Wednesday.

The Fed decided to persist with its two-pronged stance on monetary policy, i.e., maintain the targeted range for the federal funds rate at 4.25 percent to 4.5 percent, and continue "reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities."

However, Fed Chairman Jerome Powell noted during his press conference that the Fed would slow the pace of reining in the monetary base. That latter point is troubling, given that loose money has continued since the summer of 2008 (!), and the previous pace already was slug-like. This leaves the threat of higher inflation lingering, if the right (or I should say wrong) conditions materialize.

More interesting, and perhaps troubling, is the Fed's take on the economy.

First, in the FOMC statement, it was noted, "Recent indicators suggest that economic activity has continued to expand at a solid pace… Inflation remains somewhat elevated." That likely overstates the wellness of the economy and the word "somewhat" understates the reality on inflation.

But the FOMC also released its updated economic projections. And any sense of the positive is lost, or at least diminished, on both the growth and inflation fronts.

Let's just look at the projections from Federal Reserve Board members and Federal Reserve Bank presidents for this year, as going beyond that in terms of projections on the economy amounts to little more than guesswork.

First, the projected range for real GDP growth in 2025 is 1.0 percent to 2.4 percent, which was down from December estimates of 1.6 percent to 2.5 percent. The median projection for 2025 came down from 2.1 percent in December to 1.7 percent in this latest release. That would be anemic growth.

Second, the range of projections for inflation in 2025 registered 2.5 percent to 3.4 percent, compared to the December projection of 2.1 percent to 3.2 percent. As for the mean projection on inflation for 2025 went from 2.5 percent in December to 2.7 percent now. That would be notably above the Fed's target.

For good measure, Powell emphasized the added uncertainty of tariffs when it comes to where inflation is headed.

So, the Fed has grown more pessimistic on the economy for this year. And let's remember that the Fed when it comes to inflation projections tends to be more optimistic than is perhaps justified because, well, keeping inflation in check is the Fed's job, and they're not big on admitting that they're not doing their jobs well.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He is the author of " The Weekly Economist " book series, and 10 Points from Walt Disney on Entrepreneurship .