Federal Reserve Signals Economic Caution as Policy Uncertainty Slows Business and Consumer Confidence
“Driving Through Economic Fog”: As Businesses Stall, Markets Brace for a Volatile, Policy-Shaped Year Ahead
With consumers and firms frozen by policy whiplash, Tom Barkin warns of an economic standstill — but is it paralysis, or a pivot in disguise?
Today, Tom Barkin, President of the Federal Reserve Bank of Richmond, delivered what could be the most telling diagnosis of the U.S. economy so far this year. His message was simple, but stark: America is not driving through a tunnel—it’s stuck in a fog bank.
“It’s not an everyday, ‘forecasting is hard’ type of fog,” Barkin said. “It’s a ‘zero visibility, pull over and turn on your hazards’ type of fog.”
His remarks underscored a seismic shift in the economic mood — from buoyant optimism at the end of 2024 to what now feels like a climate of high-stakes hesitation. Consumers are tensing. Corporations are bracing. And markets? They’re squinting through the haze, hoping to find price signals in a policy environment that seems determined to obscure them.
From Boom to Blur: The Swift Sentiment Shift
Just months ago, the American economy appeared to be cruising. GDP clocked in at 2.5%, unemployment was a healthy 4.1%, and inflation had cooled significantly. “Sentiment was good,” Barkin recalled, noting the wave of business and consumer confidence that defined late 2024.
US Economic Indicators: GDP Growth and Unemployment Rate, Mid-2024 to Early 2025
| Period | GDP Growth (Annual Rate) | Unemployment Rate |
|---|---|---|
| Q3 2024 | 2.5% | 4.2% |
| Q4 2024 | 2.3% | 4.1% |
| Full Year 2024 | 2.8% | - |
| January 2025 | - | 4.0% |
| February 2025 | - | 4.1% |
But then came the change — not in fundamentals, but in narrative.
“Federal government policy has taken center stage,” Barkin said, pointing to a dizzying array of proposed shifts: from aggressive tariffs to lower net immigration, tax cuts, deregulation, and a renewed push for traditional energy.
Policy uncertainty, often driven by potential government actions, negatively impacts the economy. Businesses facing an unclear future may delay investment and hiring decisions, which can slow overall economic growth.
While none of these policies has yet fully landed, the anticipation of them has been enough to unsettle expectations and derail planning cycles. The March Beige Book shattered records for mentions of “uncertainty.”
And that uncertainty has teeth. Business optimism, once euphoric, has slid. Consumer sentiment has followed suit. The University of Michigan’s February reading showed a marked dip, while the Conference Board’s index showed one of its steepest declines in years. According to one analyst, “it feels like businesses are stuck in a holding pattern, with no runway lights in sight.”
US Consumer Sentiment and Business Optimism Trends in Early 2025
| Month | Consumer Sentiment (UMich) | Business Optimism (NFIB) |
|---|---|---|
| March 2025 | 57.9 (preliminary) | N/A |
| February 2025 | 64.7 | 100.7 |
| January 2025 | 64.7 | 102.8 |
Inside the Fog: Dissecting the Policy Wildcards
What makes this fog uniquely dense, Barkin argues, is not just the nature of proposed policies—but the uncertainty about their scale, timing, and net effect.
Tariffs: Bigger and More Disruptive Than Before
The comparison with 2018 is sobering. Then, average tariffs rose by 3 percentage points, nudging inflation by 0.3%. This time, with discussions of 20% tariffs on China and 25% on Mexico, Canada, aluminum, and steel, the impact could be nearly four times larger.
Table comparing the estimated inflationary impact of 2018 tariffs versus potential 2025 tariffs
| Aspect | 2018 Tariffs | Potential 2025 Tariffs |
|---|---|---|
| Estimated inflation increase | 0.1 - 0.3 percentage points | 0.5 - 2.2 percentage points |
| Consumer price increase | ~0.3% | 0.81% - 1.63% (for ~25% of consumption basket) |
| Tariff scenarios | Implemented tariffs on various imports | 25% on Canada/Mexico, 10% on China (moderate scenario) |
| 60% on China, 10% on rest of world (extreme scenario) | ||
| Relative impact | Baseline for comparison | 2 to 10 times greater than 2018 tariffs |
| Duration of impact | Short-term | Potentially longer-lasting |
| Scope of affected goods | Limited | More extensive |
And while the 2018 episode was largely absorbed, the context has changed. Inflation, while down from its 2022 peak, remains above target. Add tariffs now, and cost-push inflation risks reignite.
Did you know that cost-push inflation occurs when rising production costs, such as higher wages or more expensive raw materials, lead to increased prices across an economy? This type of inflation is driven by supply-side factors, causing businesses to raise prices to maintain profit margins as their costs increase. Unlike demand-pull inflation, which is driven by high demand, cost-push inflation often results from external shocks like supply chain disruptions or commodity price hikes. A notable example is the 1970s oil crisis, where OPEC's price increases led to widespread inflation as industries passed on higher costs to consumers. This phenomenon can temporarily slow economic growth and reduce living standards.
Immigration: Slower Workforce Growth Ahead
Forecasts suggest net migration could fall to half of 2010s levels, or a third of the Biden-era peak. For labor markets, this means tighter supply, upward wage pressure—and a potential cap on long-term growth. “Demographics are destiny,” one labor economist remarked. “If workforce growth stalls, potential GDP slows with it.”
Tax Cuts and Spending Caps: A Fiscal Balancing Act
While tax cuts could stimulate growth and spending, simultaneous cuts in government spending might offset those effects. For Barkin’s own district—where federal employment comprises 25% of D.C.’s labor force—the stakes are particularly high. As one regional economist observed, “these aren’t just policy changes; they’re direct shocks to local economies.”
Energy and Regulation: A Mixed Bag for Inflation
Pro-traditional energy moves may lower fuel prices in the short term, especially with OPEC+ signaling increased output. But global trade tensions could dampen demand. Deregulation may enhance productivity, but only after significant lags. In the near term, price volatility remains the dominant risk.
Markets and Businesses: Cautious, But Not Collapsing
Across sectors, firms are pulling back—not collapsing, but delaying. Barkin described conversations with executives across the spectrum: “They’re ‘on pause,’ ‘on hold,’ ‘frozen,’ or ‘paralyzed.’” Hospitals, nonprofits, universities—entities tethered to federal funding—appear especially wary.
Still, there is evidence of adaptation beneath the surface.
The U.S. Chamber of Commerce found that 37% of small businesses still expect to hire in 2025, with manufacturers especially optimistic. Wages continue to grow at a pace aligned with productivity. The February jobs report surprised to the upside, even as anecdotal hiring intent softened.
Did you know that recent trends in the US show a notable increase in labor productivity, with a 2.3% rise in 2024, marking the highest growth since 2010 excluding the pandemic surge? Meanwhile, wage growth has also been robust, with average hourly earnings increasing by 4.5% year-over-year as of January 2025. Interestingly, while wage growth outpaces productivity gains, the productivity surge has helped keep labor costs in check, aligning with the Federal Reserve's inflation targets. Despite strong nominal wage growth, real wage increases remain modest due to higher inflation, highlighting the complex interplay between productivity, wages, and economic stability.
“Frozen feels too strong,” said one corporate strategist. “We’re not expanding aggressively, but we’re not hunkering down either. We’re monitoring. Watching. Waiting.”
The Fed’s Playbook: Patience Amid the Policy Storm
With the labor market still firm and inflation still above target, Barkin defended the Federal Reserve’s current “moderately restrictive” stance. The central bank held rates steady at its last meeting, signaling caution—but not complacency.
“How does one drive in fog?” Barkin asked rhetorically. “Carefully and slowly.”
Chair Jerome Powell echoed the sentiment, noting that the cost of waiting for clarity is low, given a fundamentally sound starting point. Fidelity and EY both described the Fed’s posture as prudent. But not all agree.
Did you know that a 'moderately restrictive' monetary policy is a central bank strategy aimed at slowing economic growth and curbing inflation without causing a sharp downturn? This approach involves raising interest rates and controlling the money supply, but not as aggressively as a fully restrictive policy. By finding a balance between growth and inflation control, central banks seek to achieve a "soft landing" for the economy, where inflation is managed without triggering a recession. This gradual and flexible approach allows for adjustments based on changing economic conditions, making it a nuanced tool for maintaining economic stability.
Some market participants—pricing in two rate cuts for 2025—are growing impatient. Others argue the Fed might not be able to cut at all, given sticky inflation fueled by tariffs and wage pressures. RBC, for instance, sees core inflation remaining above 3% through year-end.
“The Fed is caught between a rock and a fogbank,” one portfolio manager quipped. “Too much tightening risks recession. Too little action, and inflation reignites.”
Navigating the Policy Crosswinds
Even with reduced visibility, some contours of the road ahead are taking shape. Experts are converging on several likely dynamics:
1. Slower Growth, Elevated Inflation
Vanguard, EY, S&P Global, and others have cut 2025 GDP forecasts to the 1.6–1.9% range. EY places the recession risk at 40%. Inflation projections have ticked upward to near 3%.
2. Market Volatility Is Here to Stay
Increased policy uncertainty and the Fed’s reactive stance suggest elevated volatility across asset classes. Traders anticipate “whiplash reactions” to each policy headline. Options markets already reflect this shift, with elevated premiums and a rising VIX.
3. Sector Divergence Will Define Winners and Losers
Sectors most exposed to imports, tariffs, and federal funding (retailers, aerospace, education, healthcare systems) are likely to underperform. On the flip side, firms with pricing power, strong balance sheets, domestic operations, or supply chain flexibility are poised to shine.
Did you know that sector rotation is an investment strategy that involves shifting funds between different sectors of the stock market based on the economic cycle? This approach aims to maximize returns by investing in sectors expected to outperform during specific stages of the business cycle. For instance, during a recession, technology stocks might lead, while in a bull market, industrials and energy sectors could thrive. As the economy peaks, communication services and financials might shine, and in a bear market, defensive sectors like health care and utilities tend to be more resilient. By using sector-specific ETFs, investors can easily move their money between sectors, but this strategy requires careful analysis and anticipation of economic shifts.
4. Automation and Onshoring on the Rise
Policy shifts are accelerating longer-term structural trends. Labor scarcity is prompting investment in automation and AI. Tariff risk is driving supply chain localization. “We’re shifting from ‘just in time’ to ‘just in case,’” said one logistics executive.
When the Fog Lifts, the Map May Be Redrawn
Tom Barkin’s “economic fog” metaphor captures more than a mood — it reflects a transitional economy, caught between old certainties and a new, unpredictable policy regime. Businesses, consumers, and investors alike are being forced to operate in a new tempo, where long-range planning feels perilous and short-term adaptation is paramount.
For now, the Fed is waiting. Businesses are waiting. But the fog won’t last forever. When visibility returns, it may reveal an economy not just paused, but permanently altered — structurally more cautious, politically more fragmented, and competitively more bifurcated.
And those who charted a course through the mist may find themselves far ahead when the sun reappears.