The Federal Reserve left interest rates unchanged for a third meeting in a row on Wednesday, as officials stuck to a wait-and-see approach amid heightened uncertainty about how significantly President Trump’s tariffs will raise inflation and slow growth.
The unanimous decision to stand pat will keep interest rates at 4.25 percent to 4.5 percent. Rates have been there since December after a series of cuts in the second half of 2024.
The Fed gathered at a highly volatile moment for the economy and the global financial system amid an onslaught of policy changes from Mr. Trump just months into his second term in the White House.
In a statement on Wednesday, the Fed acknowledged that the labor market was still “solid.” But policymakers also noted that “uncertainty about the economic outlook has increased further” and “risks of higher unemployment and higher inflation have risen.”
At a news conference after the statement, Jerome H. Powell, the Fed chair, said he could not yet say “which way this will shake out” in terms of whether to be more worried about inflation or growth.
He later captured the uncertainty of the moment, saying “It’s really not at all clear what it is we should do.”
Since the Fed’s last meeting in March, the administration announced and then rolled back aggressive new tariffs as Mr. Trump gave countries time to reach trade deals ahead of a July deadline. Still, a 10 percent universal tariff remains in place, along with additional levies on steel, aluminum and cars. The president has also imposed a minimum tariff of 145 percent on Chinese goods.
The whiplash has unnerved financial markets, stoking volatility as Wall Street digested the various twists and turns associated with Mr. Trump’s trade policy and his subsequent attacks on Mr. Powell for ignoring his demands to lower interest rates. Last month, investors started to flee what are considered financial “safe havens,” signaling that markets had come under strain.
The upheaval has created complications for the central bank. It is struggling to both assess the economic fallout from Mr. Trump’s policies and game out how it will set monetary policy in an environment in which its goals of maintaining a healthy labor market and keeping inflation low and stable may be in conflict.
Officials have grown increasingly worried about how much Mr. Trump’s policies, which also include slashing spending and deporting immigrants, will sap growth. Some companies have already started to warn about sluggish sales as consumers have turned much more downbeat about the outlook; the fear is that the uncertainty will further chill business activity.
But unlike in the past, the Fed is not in a position to respond to early signs that the economy is weakening by preemptively lowering interest rates. That is because of inflation: Price pressures stemming from the post-pandemic surge have not been fully snuffed out, and now Mr. Trump’s tariffs risk rekindling them.
It is too early to tell if the tariff-induced jump in inflation will prove to be temporary, or if it morphs into something more persistent. So far, market-based measures of inflation expectations, to which the Fed pays closest attention, suggest that inflation will indeed remain contained after an initial pop. But officials do not want to make the same mistake as they did just a few years ago, when they underestimated how long lasting inflation would prove to be. While officials originally expected inflation to fade after pandemic-induced supply snags, it instead persisted.
As such, the bar for the central bank to lower interest rates is higher this time.
Officials will most likely need to see tangible evidence that the labor market is beginning to weaken before restarting cuts. If monthly jobs growth grinds to a halt, or turns negative, and layoffs rise, that could be enough to bolster the central bank’s conviction that it can begin to reduce rates.
But waiting to see that show up in the data may mean that the Fed has moved too late, potentially prompting the need for officials to cut more aggressively later on.