The central bank is bracing for President Trump’s tariffs to dent growth while stoking inflation, keeping interest rate cuts at bay for now.
A solid labor market has for months given the Federal Reserve comfort that it could hold off on interest rate cuts until it had more clarity about how President Trump’s policies would impact the economy. New data released on Friday reinforced that patient approach.
Officials at the central bank are widely expected to keep interest rates steady when they announce their next decision on May 7. After lowering interest rates by a percentage point last year, the Fed has since January opted against making additional reductions. That has left interest rates at a range of 4.25 percent to 4.5 percent.
Until this point, officials have felt little urgency to lower interest rates because the economy so far has stayed on solid footing. Mr. Trump’s attempts to reset global trade relations through steep tariffs now risk upending that.
Despite the president’s decision in April to temporarily pause more stringent levies from taking effect on nearly all of the country’s trading partners, businesses have struggled to navigate the uncertainty. Many have shelved big investments and slowed hiring, and some are already raising prices. Surveys suggest that consumers also have turned much more downbeat about the outlook, fueling concern that this pessimism will eventually translate to less spending.
The fear is that consumers will cut back so aggressively that businesses will be forced to lay off workers, worsening the economic slowdown. Jerome H. Powell, the chair of the central bank, has warned that in addition to denting growth, tariffs of the nature Mr. Trump is pursuing also risk stoking inflation.
That combination risks putting the Fed in a bind. The central bank is responsible for fostering low, stable inflation as well as a healthy labor market. Officials are now having to game out what they would do if their goals for the economy come into tension with one another.