Fed keeps interest rates steady amid concerns Trump’s tariffs increase risks to economy

The Federal Reserve left interest rates unchanged Wednesday, amid growing concerns that President Donald Trump’s trade war is fueling the risk of an unhealthy combination of higher unemployment coupled with rekindled inflation.

“Uncertainty about the economic outlook has increased further,” the Fed said in a statement, adding that the risks of higher unemployment and inflation “have risen.”

The Fed also suggested that tariffs might have distorted its view of the economy. Though economic activity appeared to expand at a “solid pace,” the Fed said that “swings in net exports” had “affected the data.”

Prolonged uncertainty over the trade war could hurt economic growth and lead to job losses – conditions that might normally prompt the Fed to cut interest rates. But the same trade tensions could also fuel inflation, which would argue for raising rates.

Wednesday’s news will likely come in what Fed Chair Jerome H. Powell signals about the economy’s path and potential for rate moves in the months ahead, as the Fed wraps up its two-day policy meeting .

While the Fed waits, it remains in tension with Trump, who has repeatedly called upon Powell to cut rates to head off any downturn. “You are not supposed to criticize the Fed; you are supposed to let him do his own thing,” Trump said last week. “But I know much more than he does about interest rates, believe me.”

Mostly, Trump’s comments complicate an already difficult decision facing the Fed in the months to come.

While inflation has been falling recently, in large part because of lower energy prices, higher tariffs could soon reignite inflation, Powell and other Federal Reserve officials have said.

At first, the tariffs caused a rush of panic buying, which caused imports to surge.

But the tariffs on Chinese imports are so high and are hitting businesses so hard that some have had to halt imports. Those moves will start to work through the supply chain and lead to shortages and price hikes, companies have warned.

Meanwhile, Fed officials, still smarting from moving belatedly to tackle high inflation coming out of the pandemic a few years ago, worry that moving too quickly to cut rates now would be a mistake while inflation remains above the central bank’s 2% target.

“It’s going to be very hard for them,” said Jeremy Stein, a former Fed governor now at Harvard. He predicted the Fed won’t get through the year without either a spike in inflation or a marked slowdown.

The Fed’s benchmark short-term rate, which trickles through the financial system to influence what millions of consumers and businesses pay to borrow money, sits at 4.25% to 4.5%.

It’s the third consecutive meeting the Fed has left its short-term benchmark rate unchanged after lowering rates by a full percentage point late last year.

The Fed’s pause contrasts sharply from the optimism that defined the start of the year. Officials had been hopeful they were inching closer to the elusive “soft landing,” in which inflation cools without derailing the broader economy. The financial markets had been hoping the Fed would cut rates a few times in 2025, and the Fed had penciled in as many as four rate cuts just before the November election before slowing that estimate in December to two.

Trump’s escalating trade war has injected new uncertainty into business decisions and financial markets alike, although the White House has largely minimized the consequences of trade policy.

“Anything can happen,” Trump said in an interview with NBC’s Meet the Press last weekend. “But I think we’re going to have the greatest economy in the history of our country. I think we’re going have the greatest economic boom in history.”

The economic data hasn’t been clear-cut. The labor market appeared healthy last month, as the bulk of Trump’s new tariffs went into effect. But growth has sputtered: The economy shrank in the first three months of 2025, amid a dramatic increase in imports – which count against GDP – as businesses rushed to purchase foreign goods ahead of Trump’s promised tariffs.

Ryan Severino, chief economist at BGO, a real estate investment firm, said it would likely take a quarter or two for the full effect of the tariffs to be clearer. Though the data doesn’t necessarily point to a recession, he warned against any “false sense of security.”

At the Fed, there’s widespread agreement that tariffs will be inflationary, but officials appear to disagree on how long that will last. Fed governor Christopher Waller suggested last month that tariffs won’t raise prices beyond this year, though he acknowledged it would be difficult for the Fed to look past any temporary price surge after misdiagnosing pandemic-era inflation as “transitory.”

“It’s going to take some courage to stare down these tariff increases and prices with the belief that they are transitory,” Waller said on Bloomberg TV.

Other officials have urged caution. “I would rather be slow and move in the right direction than move quickly in the wrong direction,” Cleveland Fed President Beth Hammack said in a speech last month.

In addition to trade policy, economic uncertainty has been fueled by other factors, including the administration’s long-term immigration policy, said Diane Swonk, chief economist at KPMG. She compared the situation to a broken traffic light at a busy intersection: Traffic comes to a standstill. Those who do cross, do so cautiously. Some make a U-turn to reverse course, waiting until traffic clears up.

“That’s to me a good metaphor for how it disrupts economic activity and causes some paralysis,” she said. “That’s the opposite of what you want for momentum in the economy.”