Reuters Econ World: The Fed’s cloudy crystal ball

By Carmel Crimmins

March 20 (Reuters) - Central bankers, they’re just like you and me. Here’s Fed Chair Jerome Powell at yesterday’s post-meeting press conference:

"I mean it's just... really hard to know how this is going to work out."

Like the rest of us, Fed policymakers are scratching their heads over how U.S. President Donald Trump’s economic policies are going to pan out. Their latest projections point to tariffs fuelling inflation and sapping economic growth. They’re still expecting to deliver two quarter-percentage-point rate cuts this year but that’s largely due to weaker growth offsetting price pressures, and what Powell called the "inertia" of not knowing what else to do given the uncertain outlook.

Powell said at a post-statement news conference that he had no reason to believe that the U.S. was experiencing 1970s-style high inflation. But as Emily Roland, co-chief investment strategist at John Hancock Investment Management, put it, there is the whiff of stagflation to all of this. Let’s hope that scenario doesn’t emerge. The combination of still-high inflation and a weak or stagnant economy is a nightmare for central bankers to deal with.

It's all a far cry from the “U.S. exceptionalism” narrative that investors were buying into just a few weeks ago. If the Fed's median outlook for the next three years comes to pass, it would be the weakest three-year run of economic growth since at least former President Barack Obama's first term in the White House and the slow recovery from the 2007-2009 recession.

A nearly unanimous majority of economists see increased risks of recession, according to a recent Reuters poll. But how likely is it that the U.S. economy will contract? We get into recession on the latest episode of Reuters Econ World podcast and ask if it’s ever a good thing. Listen here.

Right now, U.S. data, including unemployment figures, are strong. But my colleague Mike Dolan makes the point that there is a potential feedback loop from falling stocks to the real economy. If stock market drops eat significantly into retirement accounts that could prompt some Americans to delay leaving the workforce. That matters, because the large numbers of Americans retiring is one of the reasons cited for the persistently low U.S. jobless rate.

Stocks are doing far better in China, where Hong Kong's benchmark Hang Seng Index, home to many major Chinese companies, is up 36% since late September, drawn by bets on artificial intelligence spurred by startup DeepSeek.

It's a busy week for central banks. The Swiss National Bank was the first major central bank to start cutting rates this cycle and with Thursday’s reduction to just above zero, some economists think it is done for now. The SNB has cut rates five times since March 2024 and now says inflationary pressures are well-contained.

The Bank of England and Sweden’sRiksbank held rates steady, as expected, as they weigh up the risks posed by global trade tensions.

The BoE warned against assumptions that rates would be cut over its next few meetings as it grapples with deep uncertainty hanging over the British and world economies.

Inertia is catching, it would seem.

The headlines

• Exclusive: Intelligence shared with White House shows Ukrainians not 'encircled' in Kursk

• Trump to sign order to shut down Department of Education, White House says

• Turkey detains 37 people over social media posts on detained Istanbul mayor

• At least 70 Palestinians killed in Israeli strikes across Gaza, health authorities say

The chart

Is it the end of "U.S. exceptionalism"? The Fed joins others in downgrading the U.S. economic growth outlook

The podcast

"  We've gone from golden age and booms and tons of jobs to transitions and detox and recessions that are worth it. You know, the Fed causes recessions on purpose every now and then to get rid of inflation. I can't think of a time in U.S. history when an administration has sort of talked approvingly about a recession that might occur." Federal Reserve Correspondent Howard Schneider on Reuters Econ World

On this week's show, we look at how real the risk is of the U.S. economy contracting as measures of consumer and business confidence take a hit. Listen here

The real world

• Berlin: Debt splurge turns screws on flagging German property

• Sydney: As Tesla tanks, Musk's hand-picked board chair is doing just fine

• Washington: Cockroaches and working in a closet: Inside Trump's return-to-office order

The week ahead

• March 26: U.S. consumer confidence

• March 26: UK Spring Statement

• March 27: U.S. GDP