Keys to the ‘cursed words’ of the Fed’s new roadmap

Two words vied to overshadow all other messages at a news conference where Federal Reserve Chairman Jerome Powell attempted to outline the central bank’s monetary policy roadmap following the agency’s meeting on Wednesday: “uncertainty” and “transitory.” The first applies to the economic situation. The second, to inflation. Both are cursed words, for different reasons. There is a third scary word (nightmarish, really) that was also heard at Fed headquarters, but only in a glancing way.

1. The economy is losing steam: “Uncertainty”

Powell was looking very happy with his “soft landing” for the U.S. economy. He never actually claimed victory, but he could almost taste it. And then Donald Trump returned to the White House, causing all kinds of turbulence. The goal of getting inflation under control without job losses or a full-blown recession is now a more difficult one. Qualitatively, the most noteworthy development in Wednesday’s Federal Open Market Committee (FOMC) statement involved the “heightened uncertainty about the economic outlook” fueled by some of Trump’s policies. In his press conference, Powell insisted on the “elevated levels of uncertainty,” a cursed word for the economy. Fed members lowered their forecast for gross domestic product (GDP) growth from 2.1% to 1.7% for this year. The world’s leading economy appears to be losing steam.

2. More inflation, but “transitory”

Fed members also revised their inflation forecasts. They raised their projection of the PCE index (a personal consumption expenditures deflator that the Fed uses as a benchmark for inflation) from 2.5% to 2.7% by the close of 2025. Powell admitted the effect of Trump’s erratic trade policy without criticizing it. “We think inflation has started to rise now, partly in response to the tariffs, and further progress may be delayed,” he explained.

Admitting that a good part of the deterioration in inflation forecasts comes from tariffs, he opened the debate on the appropriate response in terms of rate hikes: “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.” Interpreting inflation as transitory in the Covid pandemic recovery was the central bank’s big mistake years ago. Powell hedged a bit, noting that the baseline scenario is that tariff-driven inflation will not become entrenched, but he said that he will remain vigilant in case the opposite happens: “We really can’t know that. We’re going to have to see how things actually work out.”

3. A new roadmap? Stagflation

By admitting that a good part of the deterioration in inflation forecasts comes from tariffs, Powell opened the debate on less growth and more inflation. Both sound bad and mark the central bank’s new roadmap, where recession risks have “increased, but are not high,” according to Powell. The Fed chairman sees no real risk of stagflation, a word almost worse than the previous two put together. Even the suggestion of it, however, is already conditioning the future of monetary policy.

Powell repeated his phrase that one must distinguish between “signals and noise” when it comes to a nightmare scenario for a central bank, last experienced in all its starkness in the 1970s. “Core inflation is still hovering around 2%, with probably a small pickup associated with tariffs. So I wouldn’t say we’re in a situation that’s remotely comparable to that.” In May 2024 he was more graphic: “I don’t see the stag or the -flation, actually,” he said then.

The curious thing is that the two forces, lower growth and higher inflation, cancel each other out and the new roadmap, in terms of rate cuts, is the same as before. Two quarter-point cuts this year, to 3.75%-4%, and two more next year. But whereas before rate cuts were expected for good reasons (inflation seemed to be almost under control), now they seem to stem more from the bad ones (growth is losing steam).

Analysts are divided over the meeting’s messages. “The bar for cutting rates in response to signs of economic weakness is much higher in the current economic environment. We believe the risks to growth are overstated and that inflation will preclude any near-term easing of monetary policy,” said experts at Oxford Economics. “We expect the Fed to maintain current policy for longer than officials currently anticipate, with the next rate cut not due until December.”

But Citi’s reading is the opposite: “In our projections, the unemployment rate will surprise the Fed on the upside, the underlying PCE will surprise on the downside, and the Fed will implement more than the 50 basis points of cuts it announced today,” they note.

4. Powell avoids clashing with Trump

The Fed chairman pointed to tariffs as a cause of the deterioration in inflation expectations and forecasts. “They tend to reduce growth, they tend to increase inflation,” he said of tariffs, but shied away from actual confrontation. Not only because he believes their inflationary effect will be “transitory,” but because he wants to avoid appearing to judge the appropriateness of a policy decision.

On the other hand, after Trump’s controversial firing of two members of the Federal Trade Commission (FTC), an independent agency, Powell was asked if the president could do the same to him. Powell declined to make an explicit new statement on the matter, referring back to his November remarks, when he stressed that the law did not allow Trump to remove him early.

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