Markets Await Fed Decision Amid Rising Uncertainty and Recession Fears

Markets and economists widely expect the Federal Reserve to keep borrowing costs unchanged in the 4.25%–4.5% range in its decision today. However, the focus will be on the Fed’s quarterly economic projections and remarks from Chairman Jerome Powell, as uncertainty dominates global markets and economies.

The central bank’s updated forecasts will offer insight into how officials view the potential impact of Trump administration policies, as the previously stable economic outlook becomes increasingly uncertain. So far, policymakers have outlined three possible scenarios: one in which inflation slows or the economy weakens, another where inflationary pressures persist above the 2% target, and a third scenario in which both inflation remains elevated and the economy slows down. The Fed faces a difficult challenge in balancing these factors.

The word “recession” has resurfaced in financial discussions, leading economists to revise their growth expectations downward for the year. The global trade war, exacerbated by U.S. tariff policies, has intensified market anxiety.

What some Fed officials previously referred to as a “sweet spot” of steady growth and balanced risks has given way to heightened uncertainty. “A ‘soft landing’ is still possible" where the economy continues to grow while inflation gradually falls to the Fed’s 2% target, Beth Ann Bovino, chief economist at US Bank, told Reuters.

“However … we are starting to see some shocks. Trade wars … Consumer expectations signaling recession fears and inflation fears,” she added, noting that Fed policy could become even more uncertain if the Trump administration’s tariffs lead to renewed price pressures. “It’s not bad yet, but the shocks are starting to pile up.”

Concerns over an impending recession triggered a sell-off in global markets last week, with Wall Street’s S&P 500 briefly entering a technical correction, dropping 10% from its February record high. While the Fed generally downplays market fluctuations when setting policy, sharp declines can indicate weakening confidence and signal potential declines in consumer spending as household wealth diminishes.

In its December projections, the Fed’s "dot plot" suggested two interest rate cuts for 2025, bringing the federal funds rate down to 3.9%. Futures markets now suggest that the first rate cut could come as early as June, with three cuts possible throughout 2025. However, the likelihood of a third cut in December has decreased as financial markets absorb the implications of declining consumer confidence, which could signal slower growth and higher inflation expectations.

In December, Fed officials forecasted U.S. economic growth of 2.1% in 2024, with the unemployment rate edging up to 4.3% and the Personal Consumption Expenditures (PCE) Price Index ending the year at 2.5%. However, those projections were made before Trump’s tariff plans became more concrete. Comparisons have been drawn between the current situation and the tariffs imposed in the 1930s, which deepened the Great Depression. Even members of the Trump administration have acknowledged that the country could face painful economic adjustments as a result of these trade policies.

Fed officials have pointed to three potential scenarios: an economy that slows enough to warrant rate cuts, inflation that remains elevated and keeps monetary policy restrictive, or a combination of high inflation and an economic slowdown. The latter scenario could force the Fed into a difficult position, balancing its mandates on inflation and employment.

A recent Deutsche Bank analysis highlighted the challenges Fed officials will face in determining which tariff-driven price effects will be temporary and which could persist. A rise in unemployment could initially indicate modest economic weakening but could later spiral into a deeper downturn as layoffs reduce demand, triggering further job losses and economic contraction.

For now, inflation expectations appear stable, but Deutsche Bank economists noted that “greater dispersion and uncertainty … suggest they are less reliably anchored.”

“Either the economy remains resilient and high inflation keeps the Fed mostly on hold, or the government hiring cuts combined with the private sector hiring freeze caused by trade uncertainty lead to a sharp deterioration in the labor market that necessitates a steeper path of cuts,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, and his team wrote. “Discerning which path is the right one is not easy.”

Some analysts see further risks ahead.

“There is a growing risk that shocks from supply-side tariffs, slowing immigration trends and the federal government’s workforce tightening will create a persistent negative feedback loop that weakens aggregate demand,” wrote Satyam Panday, chief U.S. and Canada economist at S&P Global Ratings. Panday estimated the probability of a U.S. recession in the next 12 months at 25%, double the typical rate.

A recent Reuters poll found near-unanimous agreement among economists that recession risks have increased. However, the Fed’s new Summary of Economic Projections may not immediately reflect a shift in outlook. With recent economic data remaining stable and Trump’s policies still evolving—some facing legal challenges—the Fed’s updated projections may not show significant changes from December’s estimates.

The latest report from the Organization for Economic Co-operation and Development (OECD), the first to attempt to quantify the economic fallout of Trump’s trade policies, forecasts that U.S. economic growth will slow to 1.6% in 2026, the weakest rate since 2011 outside the pandemic. “Annual GDP growth in the United States is expected to slow from its strong recent pace to 2.2% in 2025 and 1.6% in 2026,” the OECD projected.

Higher trade barriers are expected to keep inflation elevated, which could lead the Fed to maintain its current interest rate levels until mid-2026, according to the OECD report.

The range of opinions among Fed policymakers may also be widening, reflecting growing uncertainty about the economic outlook. This uncertainty is captured in surveys released alongside the Fed’s economic projections.

Speaking in New York on March 7, Fed Chair Jerome Powell acknowledged the challenges posed by economic uncertainty. “It’s human nature to always talk about uncertainty in the way we understand things. ‘Extremely uncertain.’ We say that all the time,” Powell remarked. “The tails are thicker than you think.”

The Fed is not the only major central bank meeting this week.

Sweden’s Riksbank is expected to keep interest rates unchanged on Thursday, signaling the end of its aggressive easing cycle. The Bank of England (BoE) is also expected to maintain its current rate stance before easing later in the year, with investor focus on the division between hawkish and dovish policymakers.

Meanwhile, Switzerland’s central bank, the Swiss National Bank (SNB), is expected to cut its benchmark rate to 0.25%, the lowest in the G10. This could spark speculation about a possible return to negative interest rates, though market expectations currently do not anticipate such a move.

The Bank of Japan (BOJ) is also likely to hold rates steady, though discussions of a rate hike as early as May may take place, particularly given domestic inflation trends and market volatility driven by U.S. trade policies. Sources told Reuters that BOJ policymakers are monitoring inflation and labor conditions closely.

BOJ Governor Kazuo Ueda reinforced a more hawkish tone last week, telling Japan’s parliament that steady wage growth is expected to translate into stronger consumer spending. Japan’s unions appear on track to secure another round of wage hikes averaging 6% in this year’s spring negotiations, following an increase of just over 5% in the previous round.

By fLEXI tEAM