Jamie Spencer
Americans became more pessimistic about the economic outlook in February, even as their expectations for inflation remained largely unchanged, according to a report from the Federal Reserve Bank of New York released Monday.
Inflation Expectations Hold Steady
The New York Fed’s Survey of Consumer Expectations showed that inflation expectations for the next year edged up slightly to 3.1% from 3% in January. However, long-term inflation expectations for the next three and five years remained unchanged at 3%, still above the Federal Reserve’s 2% target.
Despite this relative stability, the survey indicated growing concerns over rising costs. Households anticipate higher price increases for food, rent, gasoline, college tuition, and medical expenses. The expected increase in home prices also rose to 3.3% over the next year, reflecting persistent concerns about affordability.
Households Report Growing Financial Pessimism
While households viewed their current financial situation as stable, their outlook for the next year “deteriorated considerably,” with pessimism reaching its highest level since November 2023.
Key findings from the report include:
- The probability of higher unemployment in a year rose to its highest level since September 2023.
- Respondents were less confident in voluntarily quitting a job and reported that finding new employment would be more difficult.
- Credit access worsened, with more Americans saying obtaining credit was harder than a year ago.
- The probability of missing a future debt payment increased to its highest level since April 2020, particularly among younger Americans and those without a college degree.
Trump’s Tariff Policy Raises Economic Concerns
The survey results arrive amid mounting uncertainty over the Trump administration’s escalating trade tariffs on major U.S. trading partners. Economists warn that these policies could fuel higher inflation while simultaneously slowing economic growth and raising unemployment.
Many analysts believe the tariffs—essentially import taxes on Americans—will further complicate economic policymaking. Reuters recently reported that recession fears across North America are rising as businesses and investors struggle to predict the long-term impact of trade disruptions.
Challenges for the Federal Reserve
The Federal Reserve faces a dilemma: inflation remains above its 2% target, but signs of economic weakness are emerging. In December, the Fed had anticipated multiple interest rate cuts in 2025. However, with tariffs threatening to push inflation higher while slowing growth, policymakers may now be forced to consider conflicting policy options.
On Friday, Fed Chair Jerome Powell acknowledged the uncertainty surrounding tariffs, stating that their impact on inflation remains unclear. He warned that new price pressures could emerge as businesses adjust to higher import costs.
Fed Officials Weigh Inflation Expectations
The Fed closely monitors inflation expectations because consumer sentiment can influence actual price trends. Despite signs of growing anxiety in surveys, some officials remain skeptical.
New York Fed President John Williams dismissed concerns about a long-term inflation spiral, attributing the rise in expectations to short-term worries.
Fed Governor Christopher Waller also downplayed survey data, favoring market-based indicators instead. “The markets are not pricing in any serious long-term inflation,” Waller said Thursday, suggesting that investors view the tariff-driven price increases as a temporary adjustment rather than a sustained inflationary trend.
With inflation still above target and economic risks mounting, the coming months will be critical in shaping the Federal Reserve’s next policy moves.
