Forward Guidance: March survey of former Fed officials and staff points to rising growth and inflation concerns
SUMMARY: The U.S. economy faces slower growth in output, higher inflation, higher unemployment, and slightly higher short-term interest rates than Federal Reserve officials projected in December, according to a survey of former central bank officials and staff conducted this month. These former Fed officials and staff members also expressed elevated concern about economic risks including recession, stagflation, and higher inflation than already projected, primarily driven by tariffs, political uncertainty, and deteriorating consumer and business confidence. The possibility of avoiding recession depends on how trade and fiscal policies unfold, they said.
The survey included 21 former Fed governors, former regional bank presidents, and former staff and was conducted between March 10 and March 15, ahead of a Fed meeting this week and a central bank update of its own economic and interest rate projections.
ECONOMIC OUTLOOK: The group of former Fed officials and staff offered three-year projections for gross domestic product (GDP), inflation as measured by the personal consumption expenditure price (PCE) index, unemployment and the federal funds rate, mirroring the Federal Reserve’s quarterly Summary of Economic Projections, which will be updated in conjunction with the central bank’s meeting March 18 and 19. Former officials also answered questions on risks to economy, the central bank’s balance sheet, and a review the Fed is undertaking on communication strategy and its monetary policy framework.
In December the Fed’s median forecast for GDP growth was 2.1% for 2025 and 2% in 2025. The median projection in the “Ex-Fed” survey included GDP projections of 1.7% and 1.8%, respectively, this year and next. Inflation estimates were marked up, to 2.7% and 2.5% respectively in 2025 and 2026, compared to the Fed’s December forecast of 2.5% and 2.1% this year and next. Core inflation estimates, excluding volatile food and energy prices, were revised up. Unemployment estimates were modestly higher.
No individual saw inflation reaching the Fed’s 2% objective in 2025 or 2026, while five people saw it exceeding 3% this year and five people saw it at or above 3% in 2026. Six people saw inflation reaching the Fed’s objective by 2027. Fifteen people saw GDP growth below 2% in 2025 and five people saw growth at 1% or lower in 2025, while 14 saw growth below 2% in 2026. Some people said they expected a quarter of GDP contraction and two people projected no growth in either 2025 or 2026. The maximum growth estimate for any year in the forecast period was 2.6%. Four people saw a much larger unemployment increase than consensus with the jobless rate reaching 5% or higher.
The group of former Fed officials did not see much leeway for the Fed to reduce interest rates to support economic growth should it slow, because of the higher inflation trajectory. In December, Fed officials penciled in two quarter-percentage-point interest rate reductions in 2025, putting the federal funds rate between 3.75% and 4% by year-end, and another two quarter percentage point rate reductions in 2026 to below 3.5%. Former officials and staff said an appropriate short-term interest rate in 2025 will be between 4% and 4.25%, meaning one rate cut from present levels, not two, with one additional quarter point rate reduction in 2026. While the group said an appropriate policy would be fewer interest rate reductions by the Fed than the central bank previously estimated, former officials and staff expected Fed officials to largely hold their own interest rate projections steady in this forecast round.
Uncertainty will give the central bank pause, some people said. “The degree of uncertainty surrounding this forecast is unusually high,” one participant said. “Federal policy has been highly volatile, making it hard to predict the course of tariffs, immigration policy, and the soon-to-come tax cuts. The direct effect of policy uncertainty is curtailing private sector activity now. Because of the uncertainty surrounding policy moves, the ultimate net effect of these policies on the economy is particularly hard to gauge.”
Former officials were asked to describe alternative scenarios to their baseline projections. Most pointed to some mix of higher inflation, stagflation or recession. Stagflation is a condition in which growth stalls and inflation rises. Former officials expressed concern about a full-blown trade war with U.S. trading partners, in which tariffs increase consumer prices, business and consumer uncertainty constrain investment and output, and the Fed is restrained from reducing interest rates due to inflation worries.
One person said, “The baseline assumes a one-quarter decline in GDP, followed by weak/modest growth. More vigorous tariff and immigration policies could lead to a more protracted decline, coupled with larger price increases. Unemployment would crest 5 percent, inflation would remain stubbornly above 3 or 4 percent, and the Fed would have a tough balancing act to manage.” Another person said if a trade war is avoided, “things are basically fine.” A recession scenario could be triggered if consumer and business confidence collapse, leading to delayed expenditures. “The biggest risk right now is stagflation, such that inflation doesn't come down as expected and the Fed has to run a tighter monetary policy, raising the risk of recession,” one person said. Another person put the risk of recession at 35%.
BALANCE SHEET: Former officials and staff were asked to estimate the size of the Fed’s balance sheet, which the central bank has been reducing in an effort to normalize financial conditions following an aggressive balance sheet expansion during and after the Covid-19 health crisis. This balance sheet reduction is sometimes called “quantitative tightening,” or QT. In 2022, the Fed’s total assets reached nearly $9 trillion. Bank reserves – which are the deposits that private sector banks keep with the central bank – exceeded $4.25 trillion. On average, former officials expect QT to run its course this year, with total assets reaching $6.5 trillion and reserves reaching $3.1 trillion, compared to $6.8 trillion and $3.5 trillion respectively in March. “We will hear something more about a possible slowing or pausing of QT during the debt ceiling period later this spring,” one person said.
FRAMEWORK REVIEW: The Fed is reviewing its “Statement on Longer-Run Goals and Monetary Policy Strategy,” which is a strategy statement that guides how it makes monetary policy decisions, last updated in 2020. Former officials had many suggestions on the strategy statement. Many survey participants said the Fed should drop or revise its “flexible average inflation targeting”, or FAIT, approach to interest rates. Under this approach, the Fed has said it is willing to run inflation above its 2% objective for some period of time following periods in which inflation runs persistently below 2%. Several people saw this framework as an asymmetric bias against low inflation. “The Fed should announce that it is abandoning its FAIT approach and will react in a symmetric manner to trend inflation running above or below target,” one person said. Another person likened the Fed’s ability to fine-tune the economy to the steering precision of cars in the early 1970s, i.e. dangerously imprecise.
Individuals had a range of other suggestions for the Fed’s framework and communication: A) Change the Summary of Economic Projections to a consensus forecast of the whole group, rather than a collection of individual forecasts; B) Widen the bands around the 2% inflation target to allow for short-term deviation in either direction; C) Drop a reference to its maximum employment goal as “broad-based and inclusive;” D) Target price levels rather than inflation rates; E) Encourage an external review by an independent inspector general or the Government Accountability Office; F) Communicate alternative scenarios for the economy beyond the baseline; G) Disclose individual forecasts used to compile the Summary of Economic Projections.
This survey is conducted by Serpa Pinto Advisory, an economic advisory firm founded by Jon Hilsenrath, a former Wall Street Journal economics writer and editor, and a visiting scholar at Duke University, in partnership with the Duke Department of Economics. The survey is conducted quarterly ahead of Federal Reserve updates to its Summary of Economic Projections and includes former Fed governors, former regional bank presidents, and staff. Each survey follows the same format and includes one or two special, topical questions. Individuals are granted anonymity to encourage participation.