Federal Reserve's Musalem Warns of Economic Slowdown Due to Tariffs

St. Louis Federal Reserve President Alberto Musalem has projected that U.S. economic growth will fall "materially below trend," attributing this outlook to new import tariffs, declining household and business confidence, a significant equity market drop, and potential retaliation from trade partners. While not anticipating a recession, Musalem expects growth to dip below the estimated 2% trend and unemployment to rise. These factors threaten to elevate inflation while depressing growth, creating a complex scenario for the Federal Reserve, which must balance its dual mandate of low inflation and low unemployment. Musalem emphasized vigilance and a balanced approach, especially as inflation expectations remain crucial to monetary policy decisions. Despite recent market volatility and tighter financial conditions, he does not perceive market dysfunction. The economic outlook has shifted under President Trump's tariff policy to one of increased uncertainty, possibly requiring future policy shifts, including interest rate adjustments. Musalem noted that businesses are cautious, placing hiring and investment plans on hold, though there are no widespread layoffs yet. Investors anticipate the Fed will maintain the current 4.25%–4.5% interest rate at its upcoming meeting, with some predicting potential rate cuts if economic conditions worsen. (source)

The Organisation for Economic Co-operation and Development (OECD) has revised its forecasts, predicting U.S. economic growth to slow to 2.2% in 2025 and 1.6% in 2026, down from 2.8% in 2024. This slowdown is attributed to the impact of tariffs and resulting trade tensions. The OECD also forecasts U.S. inflation to rise to 2.8% in 2025, up from 2.5% in 2024, due to increased costs from tariffs being passed on to consumers. (source)

The implementation of tariffs has led to significant market volatility, including a $5 trillion stock market sell-off and erratic bond market conditions. Investors are losing faith in U.S. government bonds, traditionally seen as safe assets, leading to rising yields and concerns reminiscent of past severe recessions. (source)

Surveys indicate that businesses are cautious, placing hiring and investment plans on hold due to uncertainty stemming from trade policies and market volatility. While there are no widespread layoffs yet, the potential for increased unemployment looms if economic conditions continue to deteriorate. (source)

The Federal Reserve is tasked with balancing its dual mandate of promoting maximum employment and stable prices. Given the current economic uncertainties, the Fed may need to adjust interest rates to address both rising inflation and slowing growth. Investors anticipate the Fed will maintain the current 4.25%–4.5% interest rate at its upcoming meeting, with some predicting potential rate cuts if economic conditions worsen. (source)

Musalem's projections highlight the delicate balance the Federal Reserve must maintain in the face of tariff-induced economic uncertainty. As the U.S. economy grapples with potential growth slowdowns and rising inflation, the Fed's policy decisions in the coming months will be critical in steering the nation toward stability.

Economic Turmoil Amid New Tariffs:

• Fed's Musalem sees growth slipping below trend, higher inflation risk
• US imports set to fall 20% in second half of 2025 on Trump tariffs, NRF forecast shows
• How Trump's Tariffs Could Lead to a Global Recession