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US data remains solid, but sentiment weakens

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Scale of Trump's tariff plans becoming clearer

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Fed expected to hold rates steady at March meeting

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New projections will show expected impact of Trump's plans

By Howard Schneider

WASHINGTON, March 14 (Reuters) - Since U.S. President

Donald Trump took office in January, he has imposed biting new

tariffs, with more coming, begun a disruptive cull of federal

jobs and spending, risked a political fracture with Europe, and

acknowledged that an economy that was by most measures fine when

he took over now faces some bumps, or worse.

Business and consumer sentiment have dropped, some measures

of manufacturing have weakened, and the stock prices that

contributed to record household wealth just as Trump was about

to return to Washington have declined sharply, a possible

precursor to slower spending among wealthier households that has

propped up overall consumption.

Employment growth has largely persisted, and inflation has

continued to moderate, according to the most recent data, but

tariffs imposed by the U.S. and retaliatory actions from trading

partners raise the chance that could reverse.

It's a lot to take in and next week Federal Reserve

officials - the most important U.S. economic decisionmakers

outside of the new administration - gather in Washington to try

to make sense of how the landscape has shifted since they last

met in January.

Fed Chair Jerome Powell has said it was "not for us to

criticize...or praise" the administration's decisions, but he

will have to manage the fallout, and if the landscape in January

was uncertain, the risks that were largely speculative at that

point have become more tangible.

A recent Reuters poll found near unanimity among economists

that near-term recession risks have risen, while some top

economic forecasters say slowing growth may be accompanied by

still rising prices.

The two together could force Powell and his colleagues into

difficult choices between supporting the economy and jobs with

interest rate cuts, or keeping rates higher to ensure inflation

and inflation expectations remain controlled.

'DETOX'

The Fed is expected to keep borrowing costs steady at its

March 18-19 meeting, but new economic projections will show how

the group of 19 policymakers see Trump's first months playing

out in terms of unemployment, inflation and growth, and the

monetary policy needed in response. Investors expect the Fed to

cut rates by three-quarters of a percentage point over the next

nine months, compared with the half-percentage point

policymakers expected as of December.

In his last remarks ahead of the meeting, Powell gave

"guidance on sticky inflation, inflation falling faster than

expected, and an unexpected weakening of the labor market," SGH

Macro Advisors Chief Economist Tim Duy wrote after Powell's

appearance in New York last week, scenarios in which the Fed

would either maintain the current high level of interest rates

longer than expected, or approve further cuts. "He does not

provide guidance on the combination of higher inflation and

weaker employment. Of course, that's the most interesting policy

question now."

The possibility of conflict between the Fed's 2% inflation

target and maximum employment goals has crept into policymaker

speeches as the breadth of Trump's tariff plans raised concerns

they might deliver both an extensive price shock and, just as

important for the Fed, a shock to public expectations.

Coupled with other actions that could slow growth, such as

the firing of federal workers and the cancellation of federal

contracts, Trump's first days have unleashed a contradictory set

of forces that leave the Fed to assess whether the things that

could increase prices or the ones that could slow growth and

employment come to dominate.

Treasury Secretary Scott Bessent called it all a period of

"detox" to shift the economy away from public spending. Commerce

Secretary Howard Lutnick said even a recession would be "worth

it" to put Trump's policies in place.

WORRYING SIGNS

The blow to markets and sentiment has been significant.

The S&P 500 is down over 10% from last month's record, well

below where it was when Trump's election set off a bout of

optimism among businesses that he would keep a strong economy on

track.

Rates on short-term Treasury securities have risen above

long-term yields, with investors accepting less return on a

10-year note than for a three-month bill, an 'inversion' of the

yield curve that sometimes signals a loss of confidence in the

economy over the short term.

While Fed officials have been reluctant to put much weight on

it, the gap between the 10-year and 3-month Treasuries was

flagged in earlier Fed research as the most useful spread to

monitor.

Surveys have also shown sentiment dropping among small

businesses, while a recent release from software firm Intuit,

based on data from businesses using their payroll software,

showed small firms shedding jobs in January.

The headline data, typically published in one-month

intervals with a lag, hasn't shown as much recent movement, with

much of it dating to days near the start of Trump's still less

than two-month old term.

Firms added 151,000 jobs in February, with the unemployment

rate still at a relatively low 4.1%, though the survey that

produced those estimates was too early to catch the likely

building impact of layoffs of government workers and at firms or

institutions that have seen their federal contracts threatened

or canceled.

GOLDMAN GROWTH DOWNGRADE

Inflation continued to moderate, with Fed officials still on

the whole confident it would continue to ease toward their 2%

target.

But consumption also dipped unexpectedly in January, and

consumer-facing companies, from airlines to retail giants like

Target, are warning of wary consumers and a flat sales outlook.

Meanwhile indexes that try to track uncertainty, which can

weigh on spending decisions by consumers and businesses, spiked

to levels not seen since the COVID-19 pandemic.

In a recent forecast update, Goldman Sachs economist Jan

Hatzius knocked his 2025 growth outlook for the U.S. from 2.4%

to 1.7%, and noted the downgrade had nothing to do with recent

economic data that has remained at least "decent" if not

supportive of growth.

"The reason for the downgrade is that our trade policy

assumptions have become considerably more adverse," given the

size of Trump's tariffs and his apparent intent to extend them

globally. In addition, the administration now appeared to be

"managing expectations towards tariff-induced near-term economic

weakness."