ORLANDO, Florida, June 19 (Reuters) - The Federal

Reserve took a slightly hawkish turn on Wednesday, indicating it

is worried more about rising inflation than slowing growth. But

Chair Jerome Powell suggested this outlook should be taken with

a large grain of salt.

The Fed's revised economic projections show that officials

expect U.S. unemployment and inflation to rise and growth to

slow in the coming quarters. 'Stagflationary' risks are rising.

Yet unlike most other G10 central banks, the Fed is refusing

to cut rates preemptively, opting instead to wait for more

clarity about the tariff-fueled inflation outlook before

deciding on its next step.

This is understandable. The full effects of President Donald

Trump's tariffs on prices and economic activity will only be

felt after July 9, when the current pause on so-called

"reciprocal" tariffs ends. Meanwhile, new geopolitical risks are

rising as the escalating war between Israel and Iran pushes oil

prices higher.

Given this backdrop, keeping policy "modestly" restrictive,

as Powell described the Fed's current stance, is reasonable.

But even though the economy and labor market are still

"solid" in his opinion, the growth outlook is deteriorating just

as rapidly as the inflation outlook.

Fed officials' projections anticipate that cumulative GDP

growth over 2025-2027 will be around 1.25 percentage points

lower than forecast in December, and cumulative inflation will

be roughly a percentage point higher.

If growth and inflation risks are roughly balanced, why did

officials trim their interest rate cut projections for the next

two years by a quarter point, or put another way, why do they

envisage a higher "terminal" rate?

HAWKISH TILT

This hawkish tilt may primarily be about controlling

sentiment. A central bank's number one job is keeping inflation

expectations anchored, and some recent surveys show consumers'

expectations for price increases have soared to the highest

level in decades.

However, there may be other possible motivations for

maintaining this hawkish stance.

First, the Fed missed the inflation surge of 2021-22,

stating infamously that price increases would be "transitory".

Policymakers were stung by the criticism that followed. Whether

those critiques were warranted is debatable, as no major central

bank got this call right, but, regardless, the Fed won't want to

risk repeating that mistake.

Then there are America's ballooning fiscal and institutional

risks. The combination of persistent budget deficits, a rising

debt load, a budget-busting tax and spending bill and ebbing

global faith in the dollar and U.S. assets is keeping long-term

Treasury yields elevated. This may warrant a higher long-term

policy rate too.

And finally, there are Trump's repeated verbal attacks on the

Fed, and Powell in particular, for not lowering rates. This

public criticism could actually be backfiring by prompting an

equally public display of independence by the Fed to dispel any

question of political interference.

Powell would almost certainly play down these motivations or

dismiss them outright, but they will nonetheless continue to

affect how investors interpret the Fed's actions.

LEAST UNLIKELY

Ultimately, the most important factor influencing the Fed

right now is likely the simple fact that it has no idea what is

coming down the pike.

"The level of uncertainty around economic policymaking right

now is sky-high. Other countries aren't experiencing this in the

same way. The U.S. is very unique," says Mike Konczal of

Economic Security Project.

Powell simply wants to wait and see how the landscape looks

once Trump's tariffs are settled and implemented. Erring on the

side of inaction in this environment - especially when the

economy still appears reasonably healthy - makes some sense.

But this also raises questions about the usefulness of the

Fed's "dot plot", a visual representation of all 19 Fed

officials' year-end rate projections. For example, what is an

investor to make of the fact that the median forecast for 50

basis points of easing this year was unchanged but seven

officials voted for no cuts at all?

"No one holds these rate paths with a great deal of

conviction," Powell told reporters on Wednesday. "Think of it as

the least unlikely path in a situation like this where

uncertainty is very high."

That appears to be Fed-speak for "We have no idea what's

happening. Check back in with us in a few months."

The Fed next revises its economic projections in September,

by which time there should be more visibility around tariffs,

Middle East tensions and the U.S. fiscal outlook. Until then,

Powell and company will have to sit tight and watch as

everything plays out - just like the rest of us.

(The opinions expressed here are those of the author,

a columnist for Reuters)

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