The U.S. central bank is set to reinforce its wait-and-see approach at its meeting this week as President Trump’s tariffs begin to bite.
Less than a year ago, the Federal Reserve took decisive action to bolster the U.S. economy. With inflation easing and the labor market starting to soften, the central bank opted to go big, lowering interest rates by half a percentage point and signaling further cuts to come.
Rather than a panicky response to a crisis situation, the decision amounted to the Fed taking out some insurance to protect the labor market from weakening too much.
In a barrage of attacks on the central bank recently, President Trump called on Jerome H. Powell, the chair, to lower borrowing costs in a similar fashion to prevent the economy from slowing down. But the Fed no longer has the flexibility to move pre-emptively.
Mr. Trump’s tariffs and the inflation spike they could potentially unleash have left officials much more cautious about restarting interest rate cuts despite rising risks of an economic slowdown. The Fed is widely expected to keep interest rates steady when officials gather this week, extending a pause that began in January after a series of cuts last year.
But forecasts for when the Fed will have the confidence to cut again are in a constant state of flux, injecting yet more volatility into an already tenuous moment for the economy and the global financial system. Officials will need to see tangible evidence that the labor market is starting to weaken and people are struggling to find work before taking action. If it takes time to materialize, the Fed could be on hold for even longer than expected.
That risks keeping tensions simmering with Mr. Trump, who on Sunday again criticized Mr. Powell while saying that he would not replace the chair before his term ends in May 2026.