Fed holds interest rates steady as the central bank weighs impact of Trump tariffs

The Federal Reserve said Wednesday it is leaving its benchmark interest rate unchanged, resisting pressure from President Trump to lower U.S. borrowing costs as policy makers assess the economic impact of his trade policies. 

By the numbers

The Fed said it will maintain the federal funds rate at its current range of 4.25% to 4.5%, where it’s been parked since the central bank last moved to lower short-term rates in December. 

The federal funds rate — the rate banks charge each other for short-term loans — helps determine what businesses and consumers pay in interest on loans and credit card debt. 

What does the Fed say about the economy?

The Fed, which has a dual mandate to keep inflation low while maintaining a healthy job market, on Wednesday signaled that economic risks are on the rise. 

Concerns that Mr. Trump’s tariffs could spur both higher inflation and unemployment were highlighted by Fed chair Jerome Powell in a press conference to talk about the central bank’s decision. But Powell noted that while consumer and business sentiment has sharply dropped, the impact of Mr. Trump’s tariffs haven’t yet materialized in hard economic data. 

“We’ve judged that the risk to higher inflation and unemployment has risen” since March, when the Fed last met, Powell said. But, he added, “We can’t say which way this will shake out.” 

Because of the uncertainty of the economy’s path under the Trump administration’s trade policies, the central bank wants to take a wait-and-see approach, Powell added. At the benchmark rate’s current level, the Fed has the flexibility to cut rates if unemployment rises, or hike rates if inflation reignites due to the impact of Mr. Trump’s tariffs, he noted. 

At the same time, Powell noted there are concerns that the Fed could face a situation where its dual mandate is in tension, which could occur if inflation and unemployment simultaneously spike. In that scenario, the central bank would need to focus on which side of the mandate is the farthest from the Fed’s goal, and prioritize taming that part of the economy, he added.

“This would be a complicated and challenging judgment we would have to make,” Powell said. “If the two goals are in tension — if unemployment is moving up in an uncomfortable way, and so is inflation — we would look at how far they are” from the Fed’s targets, and focus first on the economic issue that’s under greater stress, he added. 

Wall Street interpreted Powell’s comments as signaling an increased risk that the U.S. economy could slide into stagflation, or a combination of slower economic growth and higher inflation.

“The Fed still sees the economy on solid footing, but acknowledges upside risk to both sides of their mandate — unemployment and inflation — because of tariffs,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, in an email. “With stagflation risks rising, the Fed’s communications will emphasize patience until there is enough clarity in the data.”

What the Fed decision means

The Fed’s to hold interest rates steady comes amid pressure from Mr. Trump to cut interest rates, with the president writing on social media last month that the central bank has been “TOO LATE AND WRONG” for holding off on further reductions.

The latest Fed statement offers no clues on when it might consider easing monetary policy, according to Paul Ashworth, chief North America economist at Capital Economics.

“We continue to expect that, with tariffs likely to generate a modest slowdown in GDP growth to around 1.5%, the Fed will leave interest rates unchanged for all of this year,” he said in a report. 

Economists are forecasting that Mr. Trump’s tariffs will boost inflation later this year. That could provide the Fed with the impetus to cut rates, although inflation cooled in March. 

Given more subdued inflation and a buoyant job market, most economists had projected that the Fed would maintain interest rates at today’s meeting, despite some headwinds such as eroding consumer confidence and a sharp decline in first-quarter U.S. economic growth. 

“For the time being the Fed remains in a holding pattern as it waits for uncertainty to clear,” said Ashish Shah, CIO of public investing at Goldman Sachs Asset Management, in an email after the Fed’s announcement. 

Shah added, “Recent better-than-feared jobs data has supported the Fed’s on-hold stance, and the onus is on the labor market to weaken sufficiently to bring a resumption of its easing cycle.”