The Federal Reserve left its benchmark interest rate unchanged at 4.3% for the third consecutive meeting, signaling growing concern over the economic fallout from President Donald Trump’s sweeping tariff policy, even as it refrains from immediate action.
Fed Chair Jerome Powell emphasized in a press conference May 7 that the central bank is closely monitoring the effects of tariffs on both inflation and employment. “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. “There’s just so much that we don’t know. We’re in a good position to wait and see.”
Unusually, the Fed's policy statement acknowledged that both inflation and unemployment risks have increased -- a rare dual threat that points to the uncertain economic outlook triggered by ongoing trade tensions. The tariffs, particularly the 145% duties on goods from China, could both raise consumer prices and increase business costs, potentially leading to layoffs.
Economists say this dual threat complicates the Fed’s dual mandate: maintaining price stability and maximizing employment. Typically, rising inflation would prompt the Fed to hike rates, while rising unemployment would call for a rate cut.
“Depending on how things play out, it could include rate cuts, it could include us holding where we are,” Powell said. “We just need to see how things play out before we make those decisions.”
Trump, who has publicly criticized the Fed for not cutting rates, imposed tariffs on goods from about 60 trading partners in April. While some duties were temporarily paused, the administration’s aggressive stance toward China remains in place. High-level talks between U.S. and Chinese officials are scheduled to begin this weekend in Switzerland.
Despite pressure from the White House, including Trump’s latest remarks that Powell “just doesn’t like me,” the Fed chair said politics have no influence on monetary policy. “It doesn’t affect doing our job at all,” Powell stated.
Some economists believe the Fed’s acknowledgment of elevated risks signals it may hold off on any rate cuts until later in the year. “The combination of the two-sided risk assessment and the characterization of the economy as solid suggest the Committee is not looking to tee up a June cut at this juncture,” Krishna Guha of EvercoreISI told the AP, suggesting a potential cut could come in September.
While consumer spending remains robust and unemployment is low, inflation -- though down from its 2022 peak -- is expected to rise in the coming months. The Dallas Fed reported that 55% of manufacturing firms expect to pass tariff-related cost increases to customers.
“The bottom line is that inflation will be rising significantly over the next six months,” Torsten Slok, chief economist at Apollo Group, told the AP.
The Fed remains focused on inflation expectations, which can become self-fulfilling if consumers and businesses start to act in ways that amplify cost pressures. Ongoing uncertainty around tariffs has also led many businesses to postpone investment plans and retract 2025 forecasts.
As the economic impact of tariffs continues to unfold, Powell reiterated that the Fed’s future moves will be guided by data. Whether the next step is a rate cut or continued patience will depend on which risk -- rising prices or rising joblessness -- proves more severe in the months ahead.
