Recession fears are mounting — Powell’s stances on these 4 issues could dictate America’s economic path in months ahead

Following the conclusion of the pandemic, financial markets typically dismissed times of tepid economic figures and associated concerns over an upcoming recession. This year has been different.

Growing ambiguity regarding the future prospects has increased among both consumers and businesses due to the economic policies introduced by the new Trump administration. As a result, investors have become more cautious, perceiving that the economy has significantly decelerated.

This week, investors in the stock market will focus on the Federal Reserve for clues about four key areas of worry.

The first is economic fragility. Economists are now busy slashing their growth estimates for the year.

Former Boston Fed President Eric Rosengren told gudangmovies21an interview he now sees growth for the year at 1%, down from his prior forecast of 2.4%.

Julia Coronado, who leads MacroPolicy Perspectives, stated that a survey of economists conducted around the time of the Federal Reserve meeting revealed that growth projections had been reduced from 2.2% to 1.5%.

The second issue investors will want to hear about is whether the Fed can lower rates to help the slowing economy or if they hold off until they are confident the recent bump in inflation will prove temporary, said Diane Swonk, chief economist at KPMG.

Market participants in derivatives expect three reductions of 0.25 percentage points each this year.

Economists believe it might be challenging for Federal Reserve Chairman Jerome Powell to come through with his plans.

"The Federal Reserve tends to become more hawkish precisely when the economy changes in a manner that ultimately leads to a more dovish approach towards monetary policy," stated Tim Duy, who serves as the chief economist at SGH Macro Advisors.

Vince Reinhart, who leads economic analysis at BNY Investments, stated that it will be challenging for Powell to convey a message capable of calming the markets.

The Federal Reserve operates akin to an oil tanker, requiring considerable time to change direction. It’s challenging for the Fed to shift course since worries regarding the economic outlook have only recently emerged. Just a month prior, the Fed was minimizing indications of economic performance, citing that the stock market wasn’t troubled by these signals, as Reinhart pointed out.

Therefore, the Federal Reserve’s economic outlook could lean towards being more aggressive, making it challenging for Powell to soften this stance.

Duy mentioned that Powell has several tactics prepared. The Federal Reserve chair is expected to emphasize that they take the potential softness in the job market very seriously. Additionally, he is anticipated to claim that the current target for the federal funds rate, which stands between 4.25% and 4.5%, exerts "restrictive" force on inflation, aiming to bring it down.

This provides the Federal Reserve with space for reductions, according to economists. Powell can assert that lowering interest rates would merely return them to a neutral level—neither restraining nor stimulating economic expansion.

Highlighting the Federal Reserve’s perspective are opinions on how tariffs could affect the economy.

At the beginning of the year, markets anticipated that China would be central to U.S. tariff policy. However, the extension of tariffs to nearby U.S. allies such as Mexico and Canada has created chaos and unpredictability.

Economists believe there will be a shock to inflation from the tariffs that hurts economic growth.

Higher inflation will make the Fed slow to respond, the fourth concern for markets.

Coronado stated, “The short-term surge in inflation will prevent the Fed from intervening as promptly or intensively as they normally would.”

With inflation sticky, investors should understand that the Fed will be “more reactive rather than proactive” this year and won’t be able to cut rates at the first signs that the economy is weakening, agreed Robert Kaplan, the former Dallas Fed president.

The Federal Reserve will issue a statement along with economic projections at 2 p.m. EST on Wednesday.

During their gathering on Wednesday, experts predict that the Fed will keep its key interest rate unchanged as they continue to adopt a cautious approach.

In an interview with gudangmovies21, Rosengren stated that he believes the economy will become weak enough towards the end of this year, leading both hawkish and dovish members of the Federal Reserve to concur on reducing rates once or twice during the autumn.

“I had originally assumed that the tariffs weren’t going to be substantial and I had no change in policy over the course of this year, but my expectation now is that the economy will weaken sufficiently that they’ll be easing, basically for the wrong reason,” Rosengren said.

He estimates the chances of a recession to be roughly 30%. Under typical conditions, these odds would sit closer to 15%.

Meanwhile, inflation has proven unexpectedly robust during the initial two months of this year. Key indicators such as consumer expectations regarding inflation, which are closely monitored by the Federal Reserve, have surged notably.

Powell has attempted to create some space for himself by stating that the Federal Reserve does not have to rush.

"The expenses of exercising caution are extremely low. The economy is doing well and does not require our intervention; thus, we can afford to wait, and indeed, should wait," Powell stated.

The Federal Reserve chair stated that the central bank aims to comprehend the "overall impact" of President Trump's modifications across four key sectors: commerce, migration, government spending policies, and regulations.

As per the outline provided by the White House, the tariffs introduced under President Trump are anticipated to increase core PCE inflation by approximately 0.5 percentage points, says Torsten Slok, who serves as the chief economist for Apollo Global Management.

This will maintain inflation within a 3% range, which is still too high for numerous Federal Reserve officials.

Claudia Sahm, who serves as the chief economist at New Century Advisors and previously worked for the Federal Reserve, concurred that significant indications of economic slowdown would be necessary before the Fed decides to reduce interest rates.

Sahm stated that the Fed might proceed cautiously without taking action, or alternatively, if there’s significant worsening in the job market, the central bank could shift towards an increasingly aggressive rate-cutting phase.

"If the decline becomes significant enough, the hawks will join as well," she stated.

Luke Tilley, chief economist at Wilmington Trust, said he thinks there will be 100 basis points in cuts this year.

“I think consumers are not that strong” and tariffs are a big tax hike that will pull the economy down, he said.

James Egelhof, chief U.S. economist at BNP Paribas, thinks the Fed will be on hold until 2026, with growth bottoming below 1% in the third quarter and inflation peaking at 4% in the fourth quarter.

Coronado stated that reducing rates is not the ultimate solution for market issues.

"A reduction in interest rates won't be the solution to all the concerns that investors and businesses are facing at present," she stated.

Doubts regarding immigration policies, reductions in federal government contracts, and shifts in international partnerships form a mix of concerns that will prevent people from making significant choices.