Federal Reserve adjusts inflation forecast upward for 2025, citing tariffs: “A good part of it is tariffs”

The Federal Reserve’s Federal Open Market Committee (FOMC) decided to maintain the federal funds rate at its current level during its March meeting. Federal Reserve Chair Jerome Powell explained the decision to the press on Wednesday afternoon and addressed the potential impact of Donald Trump’s tariff plan on inflation.

The FOMC regularly publishes forecasts on where it expects inflation to trend in the coming years. At this month’s meeting, the committee raised its inflation forecast for 2025. When asked about the role of tariffs in this revision, Powell acknowledged the difficulty economists face in calculating their exact impact. Some goods will be subject to tariffs, while others will not, making it challenging to quantify how much more businesses and consumers can expect to pay. Nevertheless, Powell stated plainly that tariffs accounted for “a good part” of the price increases the FOMC now anticipates.

What the Fed’s decision means for your wallet

The bad news: consumers should brace for higher prices. The committee projects that the Personal Consumption Expenditures (PCE) index, which the Fed uses to gauge inflation, will rise 2.7% in 2025. This is up from the 2.2% forecasted in March 2024 and the 2.5% projection in December 2024, which had already factored in Trump’s announced tariff plans.

By December 2024, even before Trump took office, the FOMC had already adjusted its projections upward, anticipating the inflationary effects of policy changes.

Interest rates on mortgages are unlikely to fall significantly

Until the full scope of the Trump administration’s tariffs takes effect, the Fed will struggle to predict future price movements—an uncertainty Powell emphasized in his remarks. This economic unpredictability contributed to the committee’s decision to hold rates steady. By keeping interest rates at their current level, the Fed is also limiting how much mortgage, auto loan, and credit card rates can decline.

So far this year, the average rate on a 30-year mortgage has fallen by about a third of a percentage point, sitting at 6.65% as of early March. However, with inflation uncertainty lingering, significant declines in borrowing costs remain unlikely in the near term.

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