The Federal Reserve kept its key interest rate unchanged Wednesday, brushing off President Donald Trump’s demands to lower borrowing costs, and said that the risks of both higher unemployment and higher inflation have risen, an unusual combination that puts the central bank in a difficult spot.
The Fed kept its rate at 4.3% for the third straight meeting, after cutting it three times in a row at the end of last year. Many economists and Wall Street investors still expect the Fed will reduce rates this year, but the sweeping tariffs imposed by Trump have injected a tremendous amount of uncertainty into the U.S. economy and the Fed’s policies.
During a press conference after the release of the policy statement, Powell underscored that the tariffs have dampened consumer and business sentiment but have yet to noticeably harm the economy. At the moment, Powell said, there’s too much uncertainty to say how the Fed should react.
“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth, and a rise in unemployment,” Powell said. The impacts could be temporary, or more persistent, he added.
“There’s just so much that we don’t know,” he added. “We’re in a good position to wait and see.”
It is unusual for the Fed to face the risk of both higher prices and more unemployment. Typically, rising inflation occurs when consumers are spending freely and businesses, unable to meet all the resulting demand, raise their prices instead, as happened after the pandemic. Meanwhile, increasing unemployment occurs in a weaker economy, which usually slows spending and cools inflation.
A combination of both higher unemployment and steeper inflation is often referred to as “stagflation” and strikes fear in the hearts of central bankers, because it is hard for them to address both challenges. It last occurred on a sustained basis during the oil shocks and recessions of the 1970s.
Most economists say, however, that Trump’s sweeping tariffs do pose the threat of stagflation. The import taxes could both lift inflation by making imported parts and finished goods more expensive, while also raising unemployment by causing companies to cut jobs as their costs rise.
The Fed’s goals are to keep prices stable and maximize employment. Typically, when inflation rises, the Fed raises rates to slow borrowing and spending and cool inflation, while if layoffs rise, it would reduce rates to spur more spending and growth.
Powell said the Fed’s next move will depend in part on which indicator worsens the most: inflation or unemployment.
“Depending on how things play out, it could include rate cuts, it could include us holding where we are, we just need to see how things play out before we make those decisions,” he said.
Krishna Guha at EvercoreISI said the Fed’s assessment of current conditions likely pushes back the timetable for a rate cut. “The combination of the two-sided risk assessment and the characterization of the economy as solid suggest the (Fed) is not looking to tee up a June cut at this juncture.” Many economists think the Fed may not be ready to cut until September.
Trump announced sweeping tariffs against about 60 U.S. trading partners in April, then paused most of them for 90 days, with the exception of duties against China. The administration has subjected goods from China to a 145% tariff. The two sides are scheduled to hold their first high-level talks since Trump launched his trade war this weekend in Switzerland.
The central bank’s caution could lead to more conflict between the Fed and the Trump administration. On Sunday, Trump again urged the Fed to cut rates in a television interview. Trump has backed off threats to try to fire Powell, but could reconsider if the economy stumbles in the coming months.
With inflation not far from the Fed’s 2% target for now, Trump and Treasury Secretary Scott Bessent argue that the Fed could reduce its rate. The Fed pushed it higher in 2022 and 2023 to fight inflation.
Asked at the press conference whether Trump’s calls for lower rates has any influence on the Fed, Powell said, ”(It) doesn’t affect doing our job at all. We’re always going to consider only the economic data, the outlook, the balance of risks, and that’s it.”
If the Fed were to cut rates, it could lower other borrowing costs, such as for mortgages, auto loans, and credit cards, though that is not guaranteed.
A big issue facing the Fed is how tariffs will impact inflation. Nearly all economists and Fed officials expect the import taxes will lift prices, but it’s not clear by how much or for how long.
Tariffs typically cause a one-time increase in prices, but not necessarily ongoing inflation. Yet if Trump announces further tariffs — as he has threatened to do on pharmaceuticals, semiconductors, and copper — or if Americans worry that inflation will get worse, that could send prices higher in a more persistent way.
Economists and the Fed are closely watching inflation expectations, which are essentially a measure of how much consumers are concerned that inflation will worsen. Higher inflation expectations can be self-fulfilling, because it Americans think prices will rise, they can take steps that push up costs, such as asking for higher wages.
For now, the U.S. economy is mostly in solid shape, and inflation has cooled considerably from its peak in 2022. Consumers are spending at a healthy pace, though some of that may reflect buying things like cars ahead of tariffs. Businesses are still adding workers at a steady pace, and unemployment is low.
Still, there are signs inflation will worsen in the coming months. Surveys of both manufacturing and services firms show that they are seeing higher prices from their suppliers. And a survey by the Federal Reserve’s Dallas branch found that nearly 55% of manufacturing firms expect to pass on the impact of tariff increases to their customers.
“The bottom line is that inflation will be rising significantly over the next six months,” Torsten Slok, chief economist at the Apollo Group, said in an email.
Yet the tariffs could also weigh heavily on the economy, particularly because of the uncertainty they have created. Business surveys show that firms are postponing investment decisions until they have greater clarity. Many companies have withdrawn their financial forecasts for 2025 due to the uncertainty around tariffs.