The Cost of Trump’s Chaos: What Economic Uncertainty Means for American Consumers and Businesses
Banking Committee staff break down the Fed’s economic projections and what it means for prices and economic growth.
Today’s topline inflation number, as measured by the Bureau of Economic Analysis’ Personal Consumption Expenditure (PCE) data came in above expectations in May. Inflation rose by 2.3% over the last twelve months and 2.7% excluding food and energy.
Senator Warren highlighted the data in her statement this morning:
“Today’s personal consumption expenditures data release shows inflation increased 0.1% in May. This follows the Federal Reserve’s updated economic projections last week that show that Donald Trump’s chaotic tariff war is driving expectations of higher inflation, higher unemployment, and less growth – and Chair Powell made clear if it were not for Trump’s tariffs, the Fed would be cutting interest rates. One person is standing in the way of lower costs for families: President Trump. In the meantime, housing prices continue to rise, layoffs are ticking up, disposable income is falling, and consumers are pulling back on spending as they grow more and more anxious about the economy. It’s time to stop pretending the President’s economic chaos is cost-free.” – Senator Warren
There are many question marks about how much tariffs showed up in the data and how much they will contribute to inflation going forward. Those open questions, exacerbated by pressure from President Trump, have prompted some forecasters and policymakers to question the Fed’s decision to pause rate cuts. In testimony before the House and Senate earlier this week, Fed Chair Powell said that “if you just look at the… basic data and don't look at the forecast, you would say that we would have continued cutting. The difference, of course, is, at this time, all forecasters are expecting pretty soon that… some significant inflation will show up from tariffs now.”
Digging into last week’s Federal Open Market Committee’s (FOMC) economic projections highlights why the Fed is in a “wait-and-see” posture and its costs to American consumers.
The FOMC met last week and voted to keep the target federal funds rate between 4.25-4.5%. Chair Powell argues that the economy is in a strong enough position to wait for more clarity from the economic data before deciding whether to cut rates. The FOMC’s June Summary of Economic Projections, as highlighted below, show that, as compared to last December, the Fed now forecasts higher inflation, higher unemployment, and lower growth in 2025. As Ranking Member Warren has noted, a forecast that shows higher risks to inflation and unemployment puts the Fed in a difficult position. All else equal, rising inflation would typically lead the Fed to raise interest rates, while rising unemployment would lead the Fed to cut. So, until the Fed feels confident about the tariff’s effects on inflation or sees large enough weakening in the labor market, they will likely hold on taking any action. The bottom line? Consumers are in harm’s way.
Even with elevated uncertainty and forecasters raising concerns that the FOMC’s forecast indicates that stagflation is on the horizon, the FOMC’s dot plot still shows that the Fed is pricing in two rate cuts this year. The Fed’s dot plot shows where each of the 19 voting members expects interest rates to be at year-end. In September 2024, most members predicted the federal funds rate rates would fall to 3.0-3.5% by the end of 2025. However, members have steadily revised their rate forecasts upward – first in December, then again in March.
Last week revealed a sharp divide: eight members expect 2 rate cuts by year-end, while seven members expect no cuts at all. This even split signals significant uncertainty among Fed officials about the economic outlook and appropriate policy response.
What does this all mean for consumers and businesses? Higher borrowing costs. Higher interest rates directly hit consumers’ wallets. When the Fed raises rates, Americans pay more for mortgages, car loans, credit cards, and business loans. Even small changes matter. A recent CNBC analysis showed that a single 0.25% rate cut saves consumers money across all these lending categories:
Home Equity Lines of Credit (On a $50,000 HELOC):
$10.42 per month
Auto financing (on a new $35,000, five-year auto loan):
$4.14 per month
Personal loans (for a new $10,000, three-year personal loan with a lower rate):
$1.20 per month
Credit cards (for borrowers with a $5,000 balance):
$1.04 per month
Credit card debt tells the story of rising borrowing costs in stark terms. Though it represents just 6% of total household debt, credit card balances have increased 54% over the last four years to $1.18 trillion, far outpacing inflation and all other debt categories. The culprit: skyrocketing interest rates. Credit cards with variable rates usually change their interest rates within one to two billing cycles, so cardholders may notice their interest charges rise or fall fairly quickly as a result of the Fed’s decisions.
The central bank cut rates three consecutive times at the end of last year (by 0.5% in September, and 0.25% in November and again in December), but paused in January due to uncertainty about the economic outlook. Had the Fed continued cutting, Americans would have saved substantially on credit cards, personal loans, auto loans, and home equity lines over the past six months – not to mention mortgages, which dropped to a two-year low last September in anticipation of the Fed’s 0.5% rate cut last fall. With household debt continuing to grow, and delinquencies on the rise, the cost of economic uncertainty is measurable and mounting.
Today’s PCE data is unlikely to move the needle for the Fed. The data came in slightly above expectations, with year-over-year core PCE coming in at 2.7% up from last month’s 2.6%, which had already been revised up from 2.5%. Additionally, while wages grew 0.4% last month, personal income fell (-0.6%) for the first time since 2021. Consumption also contracted last month, and was revised down to 0.5% in the first quarter. Meanwhile, the labor market is still stable at the surface, but there are some concerning data week after week. Continuing jobless claims reached its highest level since November 2021, meaning that those who are unemployed are staying unemployed for longer. Together, these data could be hinting at higher inflation, higher unemployment, and slower growth just as the FOMC’s June projections suggest.
Ranking Member Warren has long called for the Fed to lower interest rates. The fastest way to see rates come down is for President Trump to end his red light-green light tariff war.