By Howard Schneider
CHARLOTTE, North Carolina (Reuters) – At the end of last year, when Americans were still looking ahead to Donald Trump’s second turn as president, most seemed right with the U.S. economy. But by late February, Richmond Federal Reserve Bank President Tom Barkin could sense the mood shifting.
Government contractors in Northern Virginia warned of a regional downturn as Trump targeted spending. Homebuilders in Richmond saw tariffs, tougher immigration rules and high interest rates boosting costs and risking higher rents. At the Charlotte, North Carolina headquarters of Coca-Cola Consolidated, a major bottler and distributor, executives said at a March meeting that between the imported aluminum in cans and the imported plastic in bottles, tariffs could mean price increases. And over steaks that night at Charlotte’s Capital Grille, consultants from EY told Barkin companies were reluctant to spend or invest.
In December, “the data was all coming in very nicely,” Barkin said, and companies felt the future under the incoming Trump administration was promising. “We were going to have business-friendly policies and a soft landing,” he said in an interview after meetings with business executives in Virginia and North Carolina attended by a Reuters correspondent.
Instead what happened is a slide towards potentially slower growth and higher prices that has not yet registered in official data but has been a steady undercurrent in the hundreds of conversations Fed officials and staff hold around the country every month. Less quantitative and more qualitative, that shoe-leather reporting has become central to Fed policymaking right now as officials try to understand where the White House’s breakneck pace of change is headed, and where interest rates may need to go in response.
“When you talk to business the answer is pretty consistent. In aggregate, on hold, on pause, frozen,” Barkin said. “Which does not mean cutting. It certainly does not mean growing. It means waiting for the fog to clear.”
DRUMBEAT
The same might be said of the Fed’s entire policymaking apparatus, including the seven Washington-based members of the Board of Governors, the 12 regional Fed bank presidents, and the staff trying to supplement slower-developing official data with interviews of business and community officials and formal surveys.
Barkin has long focused on that sort of surveillance, feeling it played to his strengths as a former McKinsey consultant. Now, with Trump trying to rewire the global economy and decisions sometimes shifting by the day, it has taken on elevated importance across the Fed.
Trump’s actions to date, and his promise to unveil an even bigger set of levies on Wednesday, may take months to be absorbed fully by markets and businesses and show up in data on jobs and prices. It’s a shift that can’t be captured, either, in forecasting models built around past economic relationships.
But policymakers still need to make decisions.
“This sort of information is very important when the sands are shifting,” said Atlanta Fed President Raphael Bostic. It was fundamental to his recent projection of fewer rate cuts and higher inflation this year, he said.
“What we heard from business contacts was, across the board, upward pressure on pricing,” Bostic said in an interview. “When you get a drumbeat that suggests there is a constancy and a stability to the story we are hearing, that tells me it is something I have to take on board.”
CONUNDRUM FOR FED
Trump has dubbed April 2 “Liberation Day,” with a White House Rose Garden event planned to announce sweeping tariffs beyond those already unleashed since his return to power in January.
He claims his actions will sever U.S. reliance on foreign trade and lead to more growth and jobs and lower prices. Economists are widely skeptical, confidence surveys have sunk, and to the extent the stock market reflects expected economic outcomes, the outlook is negative.
A combination of slowing growth and rising prices would be a painful conundrum for the Fed. Policymakers may be forced to weigh whether they are more worried about the risk of sinking output and rising unemployment, which might make the case for rate cuts, or about the risks of higher inflation, which would argue for tighter monetary policy.
For now, the Fed has said rates will remain on hold, with the unknowns around Trump’s intentions and the widespread uncertainty heard from businesses anchoring their skittishness about making any decision too quickly.
The Fed’s Beige Book – an anecdotal survey of commercial and community contacts published eight times a year before every policy meeting – captures that mood. The most recent saw 45 references to “uncertainty” versus 28 in December and roughly a dozen through much of last year.
Extracting an economic signal from all that can be tricky, but policymakers say it’s their best hope for real-time insight, akin to the broad net cast for alternate data during the pandemic.
“We do a lot of asking all the time…It’s most salient…in moments of transition where the official data comes out with a month or one-quarter lag. On the ground information that’s in real time can be particularly useful,” Chicago Fed President Austan Goolsbee told Reuters. It’s particularly important “when there are crucial business decisions and market decisions that are getting made…Like if they put a 25% tariff on Canada and Mexico, how much of that will be passed through to consumer prices, and how fast will that happen?”
HIGHER INFLATION, SLOWER GROWTH
The message can vary by region.
San Francisco Fed President Mary Daly, who spoke to Reuters by phone while meeting with businesses in Fairbanks, Alaska, recently, said she has heard nothing in her conversations to change her baseline views.
“I’m hearing from everybody in the West that they haven’t paused their plans to invest in their businesses, that they still see strength in the economy. So I think that’s all good news,” Daly said.
But in his district, Barkin said the openly optimistic firms right now were those with U.S.-focused supply chains, like a Virginia pharmaceutical company that looked at import tariffs as an advantage, or those in industries like banking expecting lighter-touch regulation.
Meanwhile, farmers anticipate retaliatory tariffs and a difficult choice between lower profits or higher prices and a possible loss of market share; grocers and other retailers are worried about whether consumption can hold up; manufacturers are divided depending on what they make; and “anyone who is in home building or home-building products is also very negative. Some are looking at layoffs,” Barkin said.
The net of what Barkin is hearing?
“Somewhat higher inflation and slower growth. That is straightforward.”
(Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Andrea Ricci)
