Federal Reserve Chairman Jerome Powell and his team opted to keep interest rates steady this Wednesday. Although inflation showed signs of easing last month, prices are still rising at a rate that is higher than the central bank’s comfort zone.
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Spencer Platt/Getty Images North America
The Federal Reserve decided to maintain interest rates on Wednesday, as officials await clearer indications of how tariffs and other policies from the Trump administration will affect the U.S. economy.
Members of the Federal Reserve’s rate-setting committee voted to keep their benchmark rate within the range of 4.25% to 4.5%. Recent forecasts shared on Wednesday indicate that, on average, committee members anticipate a potential reduction of borrowing costs by approximately half a percentage point later this year, provided inflation continues to decline.
However, Trump’s tariffs may complicate this outlook. Recent surveys indicate that an increasing number of businesses plan to raise prices, and consumers are anticipating heightened inflation since the president’s tariffs were implemented last month.
Trump has imposed tariffs of 20% on all imports from China and 25% on steel and aluminum imports globally. The president is also gearing up to introduce additional import taxes starting next month.
Uncertainty surrounding trade policies, coupled with the inconsistent implementation of tariffs, has contributed to stock market volatility early this month.
Evaluating Tariff Impact
The Fed is working to determine the overall economic impact of these tariffs alongside the administration’s strategies to limit immigration, reduce taxes, cut federal spending, and rollback regulations.
“We are focused on distinguishing the important signals from the noise as we navigate the changing outlook,” Fed Chair Jerome Powell mentioned earlier this month. “There is no rush, and we are well-positioned to await clearer insights.”
Powell emphasized that while the trade policies from the White House have introduced substantial uncertainty—where tariffs can be enacted one day and suspended the next—the general economy remains resilient. The unemployment rate stood at a low 4.1% in February, and the annual inflation rate decreased to 2.8%.
Customers shopping for produce at a grocery store in Austin, Texas, on Feb. 12, 2025.
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Brandon Bell/Getty Images/Getty Images North America
Consumer spending has slowed down this year, which may lead to a decrease in economic growth. Should this trend continue, the Federal Reserve could feel increased pressure to lower interest rates.
In contrast, if tariffs exert upward pressure on prices, the Fed may prefer to keep interest rates elevated to prevent inflation from re-emerging. Members of the rate-setting committee are now forecasting slightly higher inflation for this year than they did three months ago.
“Everyone is projecting some inflationary impact due to tariffs,” Powell stated, although the precise extent to which the import taxes will inflate prices remains uncertain.
“We are in a phase where there is still significant uncertainty regarding what will be taxed, for how long, and at what rates,” Powell said. “We will have to wait and see how everything unfolds.”
Tariffs and Threats
Should tariffs only cause a one-time increase in prices, the Fed might not feel compelled to adjust interest rates upward. However, a prolonged trade dispute involving escalating tariffs could dictate a different response.
A pertinent instance arose last week when the European Union threatened to retaliate against Trump’s steel and aluminum tariffs by taxing imports of U.S. whiskey and additional products. Trump responded on social media, suggesting a 200% tariff on European wines and spirits as retaliation.
Even if the economic intimidation does not result in actual tariffs, the mere threat creates enough uncertainty to affect financial markets and cause business leaders to hesitate before making new investments.
Three months ago, Federal Reserve officials forecasted that the U.S. economy would expand by 2.1% this year, with unemployment peaking at 4.3%. Currently, those projections have been revised downward to an expected growth rate of 1.7%, with a higher anticipated unemployment rate of 4.4%.
