Chris Bergen, who runs a commercial greenhouse business in northern Minnesota, finds himself “walking a tightrope” roughly two months into President Trump’s second term. Acute uncertainty about how the administration’s trade and immigration policies will unfold and affect the economy has made him much more cautious about any expansion plans.
As one of the country’s biggest producers of bedding plants, perennials and other flowers, Bergen’s Greenhouses is exposed on many fronts.
Every June, it trucks in more than six million pounds of peat moss from Manitoba. Suppliers have stopped quoting prices until they have more clarity on tariffs. The plastic flower pots that Mr. Bergen imports from China could also wind up costing more if tariffs remain in place, squeezing already “razor-thin margins,” he said. He is also worried about needing to find workers if Mr. Trump, as part of an immigration crackdown, ends a program that provides temporary visas to many of the company’s agricultural workers.
“We’re not putting our foot on the brake, but we are taking our foot off the gas,” said Mr. Bergen, whose family has run the business for over a century.
That caution is one of the biggest concerns for the Federal Reserve, which is facing an increasingly challenging economic moment with little precedent. The central bank is trying to get a better read on the economy as it debates when — or if — it can again lower interest rates with inflation still too high for its liking. Businesses are warning of both higher prices and slower growth, effects that have yet to show up entirely in the economic data.
The 12 regional presidents at the central bank have always kept close tabs on businesses in their districts in order to understand how economic conditions are evolving. That local outreach has taken on new significance as the range of possible outcomes has widened drastically.
“We always get conflicting signals from the economy, and these help us sort out signal from noise,” Neel Kashkari, president of the Minneapolis Fed, said of his conversations with businesses.
During a visit last week to Detroit Lakes, Minn., Mr. Kashkari heard from Mr. Bergen and other business owners with similar concerns about lingering inflation, slowing growth and elevated interest rates.
Over 1,600 miles away in Manchester, N.H., Susan M. Collins, president of the Boston Fed, heard many of the same fears.
Melissa Florio, president of Ambix Manufacturing, a plastics producer, was one of the business leaders to speak to Ms. Collins. Customers have cut back on their orders and costs are rising as Ms. Florio’s vendors prepare for tariffs. A supplier recently told her that the price for one mineral from China that is used to make a flame-retardant product was going up 354 percent.
Ms. Florio has since grown worried about a recession. “Every day is an up-and-down yo-yo,” she said.
What the Fed is trying to figure out is to what extent Mr. Trump’s policies will reignite an inflation problem that the central bank was close to vanquishing last year. It also does not know whether there will be a significant pullback in consumer demand that eventually drags down economic growth. That combination would be a thorny one for the central bank, putting its goals of achieving stable prices and low unemployment at odds.
The Fed, which began cutting interest rates last year as inflation cooled, has held off on additional moves for now. If it restarts cuts before it is certain that price pressures are not flaring up again, inflation could stay stubbornly high. If it waits too long to cut, it could cause unnecessary economic damage.
“I totally understand that people would really like a lot more clarity, especially because so many other things are uncertain,” Ms. Collins said. “Wouldn’t it be nice if we could be very clear with a nice road map? That’s not the way monetary policy works.”
‘Hard’ vs. ‘Soft’ Data
Since the pandemic, betting against the resilience of the U.S. economy has been a losing wager. Year after year, it has defied doomsday forecasts that a recession was inevitable — warnings that reached a fever pitch in 2022 at the height of an inflation shock that prompted the Fed to raise rates at the fastest pace in decades.
That caution has resurfaced because of Mr. Trump’s policies and the haphazard manner in which he has rolled out tariffs and other economic plans.
Looking at what policymakers call “hard” data, which typically refers to quantitative-based indicators like growth and employment, the economy still appears to be on solid footing.
Consumers have started to pull back on spending, which accounts for more than two-thirds of economic activity, and are saving more. But layoffs remain historically low, as does the unemployment rate, at 4.1 percent.
“Soft” data, such as survey-based measures tracking consumer confidence and sentiment more broadly, point to doom and gloom. Americans are bracing not only for slower growth and higher unemployment but also for rising prices. These surveys tend to be a poor guide for actual economic activity, but the magnitude of the sentiment shift has raised alarm bells.
“If there’s a dramatic change for the better or worse, I think it’s worth paying attention to,” Mr. Kashkari said.
At one event, billed as part of the central bank’s “Fed Listens” series, Mr. Kashkari polled a crowd of over 200 about their outlook. About 40 percent had a “somewhat” or “very” pessimistic view on the economy, with nearly 20 percent “neutral” on the trajectory. More than 70 percent expected prices to increase “some” or “a lot” in 2025.
‘It’s Just Too Chaotic’
Already, there are signs that businesses have retrenched, delaying planned investments and putting hiring on ice until they have a better sense of what to expect from the Trump administration.
Dynamic Homes, a modular home construction company in Detroit Lakes that relies on Canadian lumber, is caught in this limbo. If Mr. Trump follows through on his tariff threat, that will add yet another financial headwind. Since Covid, the company’s construction costs have risen around 30 percent, and insurance expenses have surged alongside interest rates.
Roughly 20 percent of the company’s $25 million operation also comes from federal government contracts. Steep cuts by Elon Musk’s Department of Government Efficiency have caused “a state of paralysis,” said Paul Okeson, chief executive of Dynamic Homes.
He is thinking about shelving plans to upgrade parts of the company’s 110,000-square-foot factory, which would have cost as much as $1 million. He is also scaling back plans to buy new semitrailers for hauling homes across the region. Each would have set the company back around $200,000.
“It’s a lot of capital with a lot of uncertainty right now,” Mr. Okeson said. “We’re already in a delicate market, so it doesn’t take much to really throw it off course.”
Casey Mittag, general manager at Foltz Trucking, is confronting tough choices, too. The Detroit Lakes company has a fleet of 120 trucks transporting grains for distilleries, pet food and consumer staples throughout the Midwest and Canada. Trying to get ahead of Mr. Trump’s levies risks tying up needed funds. Mr. Mittag is thinking about extending warranties on existing equipment to avoid having to make new purchases.
Velcro is also starting to game out how to respond if the tariffs bite. While the company has a pipeline of new projects in the works, it is also considering bringing some of its Mexican-based operations back to the United States, its chief executive, Gabriella Parisse, said.
For Ms. Florio at Ambix, the stakes are simply too high to commit to big expenses without more clarity about where the economy is headed.
“You don’t want to make a foolish move and then regret it, so it’s best to just hold back and feel a little pain and pinch points, then take the leap and have to lay people off or not make a payment on a piece of equipment,” she said. “We’re not making any moves right now. It’s just too chaotic.”
Stagflationary Shock?
The central bank’s approach to the current situation might look different if price pressures were not still lingering.
In 2019, during Mr. Trump’s first trade war, the Fed responded to signs that the economy was losing steam. Subdued inflation gave it flexibility to lower rates, lengthening an already historically long expansion.
That playbook could still apply if tariffs do not lead to sustainably higher prices. Jerome H. Powell, the Fed’s chair, has suggested that is the central bank’s base case, justifying why most Fed officials last month continued to project half a percentage point’s worth of cuts this year. They did so as they raised their estimates for inflation and lowered those for growth.
But the wide range of responses from the officials and the huge degree of uncertainty underpinning them underscored just how precarious those forecasts appear to be.
Mr. Kashkari was among the officials who penciled in two quarter-point cuts this year given his view that growth concerns and a “shock to confidence” would overshadow any temporary boost in inflation due to tariffs. However, he acknowledged the risks to that outlook.
“If inflation just moves sideways, I’d be in the camp of we just sit here as long as needed until we get inflation back down,” he said.
Ms. Collins, who will cast a vote on monetary policy this year, echoed that stance. She is bracing for slower growth and a slower retreat in inflation because of tariffs. That is likely to mean the Fed is on hold for longer than she thought back in December. While there is a risk of a “self-fulfilling spiral in a challenging direction,” Ms. Collins does not think a stagflationary episode — the dreaded combination of high inflation and stagnant economic growth — is in the making.
Others are far less certain. MacroPolicy Perspectives, a research firm, polled 115 economists, portfolio managers and other experts last month about their outlook. Most were bracing for the combined effect of Mr. Trump’s policies to be a “stagflationary supply shock,” resulting in a 0.6-percentage-point hit to growth and a half-point rise in the unemployment rate to 4.6 percent over the next year.
Respondents also expected inflation, as measured by the Personal Consumption Expenditures price index, to rise 0.5 percentage points over that period. As of February, it stood at 2.5 percent. Even as recession odds were marked up to 30 percent, most thought the Fed would be constrained in its response, forecasting only one quarter-point cut in the next 12 months.
Pivotal to how much leeway the Fed will have to respond to flagging growth is how inflation expectations evolve. So far, surging expectations have been isolated to a handful of survey-based measures, one of which Mr. Powell recently called “an outlier.”
But for Loretta Mester, who retired as president of the Cleveland Fed in June, the upward lurch in inflation expectations as views have splintered has been significant enough to warrant concern.
“Internally they have to sit up and take notice of that even though in public they’re trying to downplay it,” she said. “You look at those measures and you have to say, ‘Wow, these may not be as well anchored as we’d like.’”
If this persists as growth slows, the Fed will face extraordinarily tough policy decisions as it weighs whether to focus more on reining in inflation or protecting the labor market. Absent material signs that the labor market is significantly deteriorating, Ms. Mester endorsed the central bank’s staying on hold long enough to be certain about its grip on inflation.
“They’ve got to be thinking right now about how they’re going to balance those risks,” she said.