The Federal Reserve downgraded its projections for U.S. economic performance this year, along with several primary economic indicators.
The U.S. central bank sees lower economic growth, higher unemployment and higher prices amid major changes in U.S. trade policy and worsening geopolitical tensions.
U.S. gross domestic product (GDP) growth for 2025 was pulled down to a prediction of 1.4 percent from 1.8 percent made in March. That’s in line with a recent World Bank forecast, which also predicted growth for this year at 1.4 percent.
GDP grew last year at a robust 2.8 percent.
Unemployment will rise to 4.5 percent this year from its current level of 4.2 percent, Fed economists predicted Wednesday. Its previous prediction was for unemployment to average 4.4 percent this year.
Prices, as measured by the personal consumption expenditures (PCE) price index, are expected to rise to an annual increase of 3 percent, compared to a 2.7-percent prediction made in March.
Prices in the PCE are currently at a 2.1 percent annual increase while those in the consumer price index (CPI) are at a 2.4-percent annual increase. A jump to 3 percent would be a sizable gain.
Price increases from tariffs have not shown up definitively in the price data so far, though CPI rose slightly between April and May.
Import prices were unchanged in May.
Prices for clothes, which are a heavily imported good, have fallen by about 1 percent since last year while margins in the sector have stayed flat.
Economists say that this suggests that companies are eating the costs of tariffs in this sector.
“Steady margins also correspond roughly to declines in apparel import prices and consumer prices in recent months,” former Fed economist Claudia Sahm wrote in an analysis. “Any extra costs of tariffs (not offset by the lower import prices) appear to be absorbed by businesses.”
However, U.S. inventory levels take about three months to clear, and many economists are expecting price increases to show up in earnest over the summer.
The Fed’s boosted inflation projection adds heft to the expectation.
Fed officials also said they will continue reducing their holdings of Treasuries and mortgage-backed securities.
The Fed has been trimming its balance sheet since 2023. Assets stand now at $6.67 trillion, though its curve has been tapering in recent months. The U.S. M2 money supply, which includes savings deposits and small CDs, is at an all-time high of $21.8 trillion and rising.
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