Key Points:

  • The Federal Reserve kept its benchmark interest rate unchanged in the 4.25% to 4.5% range on Wednesday, while warning that risks of inflation and unemployment have risen and economic outlook uncertainty has increased.
  • Policymakers voted unanimously to reaffirm theirwait-and-see stanceon monetary policy. This comes after weeks of emphasizing the unpredictability of the economic impact of the Trump administration's tariff policies and changes in fiscal, regulatory, and immigration policies.
  • Federal Reserve Chair Jerome Powell said at a press conference: "If the announced large-scale tariff increases are sustained, they are likely to lead to higher inflation, slower economic growth, and higher unemployment. My intuition tells me that the path of the economy is highly uncertain, and downside risks have increased."

Deeper Analysis:

Since Federal Reserve officials met in March, President Donald Trump has imposed 10% tariffs on nearly all U.S. trading partners, 145% tariffs on Chinese imports, and targeted tariffs on aluminum, steel, and automobiles.

Economic data before Trump's early April tariff storm was mixed. Although the economy contracted 0.3% in the first quarter, U.S. companies' early imports to get ahead of tariffs were the main reason for the contraction.

The Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index excluding volatile food and energy prices—fell to 2.6% in March, down from 3% in February, but still above the central bank's 2% target level.

Powell said: "Underlying inflation conditions are good, but there are too many factors we don't know."

He said: "We are in a favorable position to wait and see." He added, "The economy has been resilient and performing quite well... We don't need to rush" to adjust monetary policy.

Economists and policymakers, including Powell, have said tariffs will push up price pressures at least temporarily, while noting that the long-term inflation outlook depends largely on consumer and business expectations.

Recent surveys show that business confidence and consumer confidence have declined in recent months, partly due to concerns that tariffs will push up inflation and slow economic growth, thereby dampening job growth.

Speaking about inflation expectations, Powell said: "Survey respondents—including consumers, businesses, and professional forecasters—point to tariffs as the main driver over the next year or so."

"However, most longer-term expectations indicators remain consistent with our 2% inflation target," he said.

The economy has shown signs of slowing. Household spending grew only 1.8% in the first quarter,the slowest pace since the second quarter of 2023.。

Additionally, the Institute for Supply Management (ISM) said Thursday that manufacturing activity contracted for the second consecutive month in April, falling to theline between expansion and contractionlevel.

Meanwhile, the U.S. added 177,000 nonfarm payroll jobs in April,with the unemployment rate holding steady ata historically low 4.2%.

Powell said: "The unemployment rate remains low, and the labor market is at or near full employment."

Some data may not yet reflect potential short-term economic disruptions from Trump's April 3 tariff announcement. For example, information on job growth comes from mid-April and may reflect companies' hiring decisions from February and March.

After the tariffs were implemented, economists at institutions such as Citigroup and Goldman Sachs raised their estimates of the probability of a recession in 2025.

However, in recent weeks some economists have lowered the likelihood of a recession, citing stable job growth and signs that the U.S. and China will begin trade negotiations.

"We believe in the resilience of the U.S. economy," Ed Yardeni, president of Yardeni Research, said in a client note Wednesday. He lowered the probability of a recession from 45% to 35%, noting that Trump faces some urgency in easing the trade war.

Referring to the November 2026 midterm elections, Yardeni said: "Trump needs to resolve the trade issue for Republicans to maintain their majority in Congress."

Despite inflation remaining above the central bank's target, the president has publicly called on Powell for weeks to lower the federal funds rate.

Powell reiterated that the central bank aims to maintain its independence and will not yield to pressure from Trump or anyone else to change monetary policy in any way.

Powell said that pressure from the president on policymakers "does not affect our duties at all. We will only ever consider economic data, the economic outlook, and the balance of risks—nothing more, we will only consider those."

Editor's Note: This article is an update to an earlier report.