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Federal Reserve leaves key rate unchanged as it sees risk of higher prices and higher unemployment

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WASHINGTON (AP) — 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 higher unemployment and higher inflation have risen.

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 two or three times 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.

It is unusual for the Fed to say that the risk of both higher prices and more unemployment have increased. But economists say that is the threat created by Trump’s sweeping tariffs. 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.

As a result, the tariffs have put the Fed in a difficult spot. 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.

At a press conference after the release of the policy statement, Powell repeatedly said Fed officials are in a position to “wait and see” what the ultimate impacts of the tariffs are. At the moment, Powell said, it’s too soon to tell.

“There’s so much uncertainty about the scale, scope, timing and persistence of the tariffs.”

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 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 and said Powell “just doesn’t like me because I think he’s a total stiff.”

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, it could lower other borrowing costs, such as for mortgages, auto loans, and credit cards, though that is not guaranteed.

Trump also said he wouldn’t fire Powell because the chair’s term ends next May and he will be able to appoint a new chair then. Yet if the economy stumbles in the coming months, Trump could renew his threats to remove Powell.

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.

Kathy Bostjancic, chief economist at Nationwide, said this could keep the Fed on the sidelines until September.

“It’s hard for them to cut sooner because they’ve got to weigh, what’s the inflation impact?” Bostjancic said. “Is this going to be somewhat persistent and add to inflation expectations?”

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.

Ryan Sweet, chief U.S. economist at Oxford Economics, said the uncertainty surrounding trade policy gives him “night terrors.”

“The economics of uncertainty are absolutely suffocating,” Sweet said. “Businesses that don’t know the rules of the road, their knee-jerk reaction is to sit on their hands. And that’s what they’re doing.”

But if the uncertainty delays hiring, slows the economy and pushes up the unemployment rate, the Fed could quickly shift toward interest rate cuts. A sharp economic slowdown could eventually cool inflation by itself, economists say.

“If you felt like the economy was really slowing down, then I think that would probably take precedence (over inflation), because usually the way the committee thinks is that will also drag inflation somewhat with it,” said Jim Bullard, former president of the Federal Reserve’s St. Louis branch, and currently dean of Purdue University’s business school.

In March, the Fed signaled that it could cut rates twice this year. But then the Trump administration announcing the broad duties in early April, which Powell said last month were larger and broader than the Fed expected.

By CHRISTOPHER RUGABER
AP Economics Writer

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