The economic outlook is back to square one, despite months of upheaval
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Illustration: Eniola Odetunde/Axios
Since the top leaders of the Federal Reserve last wrote down their projections for how the economy and rates policy will evolve in the coming years, there has been an endless cascade of teeth-rattling economic news.
The big picture: Despite it all, the economy and policy outlook are right back where they were three months ago.
- For that reason, expect the tone of cautious patience that the Fed showed at its last couple of meetings to persist this week — notwithstanding the president's calls for massive, imminent rate cuts.
Catch up quick: It's a huge week for global central banking, with a Bank of Japan policy announcement due out Tuesday, a Federal Reserve meeting concluding Wednesday and the Bank of England on Thursday.
Flashback: In mid-March, the last Federal Open Market Committee meeting at which officials released quarterly projections, uncertainty hung in the air.
- It was clear that tariffs were going to rise much higher than they have been in recent decades, with uncertain effects on inflation and growth. But the conventional wisdom was that the president would not push them so high as to create de facto trade blockades or major recession risks.
- The stock market had been recently scraping new highs, despite pervasive uncertainty.
- The unemployment rate was 4.2%, and inflation was well-contained near the Fed's 2% target.
State of play: Now, tariffs have been hiked even higher than in recent decades, but for most countries and goods, tariffs look likely to settle at something near 10% — high, but not ruinous.
- After the April 2 "Liberation Day" sell-off in stocks and bonds, markets have completed a round trip. U.S. stocks are back near all-time highs.
- The unemployment rate was still 4.2% in May, and inflation still looks well-contained near 2%.
The intrigue: Some of the other sources of policy-fueled fog from three months ago have cleared up somewhat.
- There were open questions then about whether DOGE would achieve sufficiently major firings of federal employees and other spending cutbacks as to affect the overall job market. Sure doesn't look that way now!
- Three months ago, there was wide uncertainty on what tax legislation would consist of and when it might pass. Now, it has largely come together and passed the House, with a Senate version due up this week.
- It appears front-loaded, with immediate tax cuts followed by medium-term spending cuts. That translates into near-term fiscal stimulus.
Between the lines: If Fed officials had just taken a long nap following that March meeting, they would wake up feeling like the basic outlook was unchanged, with some near-term economic risks diminished.
- Against that backdrop, they probably wouldn't radically revise their forecasts, the dramatic economic policy news flow of the last three months notwithstanding.
- The median Fed official three months ago saw two rate cuts this year. What also hasn't changed in that span is the range of possibilities for where things go from here — whether a tariff-driven surge in inflation or slumping economic activity is a greater risk.
What they're saying: "We see the FOMC's objective at this meeting as expanding the range of possible policy responses while committing to none," wrote Steve Englander, head of North American macro strategy at Standard Chartered Bank.
- "In our view Fed Chair [Jerome] Powell will emphasise the wide range of possible policy outcomes and the need to wait for more data on how the economy and inflation are evolving," he added.
