The Federal Reserve kept its main interest rate the same on Wednesday, ignoring President Donald Trump's requests to lower borrowing costs. They also said that the risks of both more people being unemployed and prices going up faster have increased. This is an unusual situation that makes things difficult for the central bank.

The Fed kept its interest rate at 4.3% for the third meeting in a row, after lowering it three times in a row at the end of last year. Many experts and investors still think the Fed will lower rates this year, but the big taxes put in place by Trump have made the U.S. economy and the central bank's plans very uncertain.

At a press conference following the release of the policy statement, Chair Jerome Powell emphasized that the tariffs have adversely affected consumer and business confidence but have not yet caused significant economic damage. Currently, Powell stated, the level of uncertainty is too high to determine the appropriate Federal Reserve response to the tariffs.

Powell said that if the big increases in tariffs that have been announced continue, they will probably cause inflation to rise, economic growth to slow down, and unemployment to increase. He added that the effects could be temporary or last longer.

It is uncommon for the Federal Reserve to be confronted with the simultaneous threats of escalating prices and increased joblessness. Typically, inflationary pressures arise when consumer spending is robust and businesses, unable to satisfy the heightened demand, resort to raising prices, as was observed in the aftermath of the pandemic. Conversely, rising unemployment tends to occur in a weakened economy, which generally leads to reduced spending and a cooling of inflation.

When high unemployment happens at the same time as fast-rising prices, it's often called "stagflation." This worries central bankers a lot because it's hard for them to fix both problems at once. This situation lasted for a long time in the 1970s during the oil crises and economic problems.

However, many economists say that Trump's big tariffs could cause stagflation. They explain that these import taxes might increase inflation because imported parts and goods become more expensive. At the same time, they could also increase unemployment as companies might cut jobs when their costs go up.

The Federal Reserve aims to maintain price stability and achieve maximum employment; generally, when inflation accelerates, the Fed increases interest rates to curb borrowing and expenditure and temper inflationary pressures, whereas if unemployment escalates, it would decrease rates to stimulate greater spending and economic expansion.

At the start of the year, analysts and investors anticipated the Federal Reserve would decrease its main interest rate two or three times this year, given the continued decline of the post-pandemic inflation surge. Some economists also contend the Fed ought to implement cuts proactively, foreseeing slower growth and rising unemployment due to tariffs. However, Powell insisted that, with the current robust state of the economy, the Fed is able to maintain a neutral stance.

A few months ago, numerous analysts anticipated the economy would achieve a "soft landing," where inflation would ultimately return to its 2% target, with unemployment remaining low alongside robust growth.

Nevertheless, on Wednesday, Powell expressed reservations about the probability of that being realised.

"Should tariffs be enacted at those levels, it would impede further advancement towards our objectives for roughly the coming year," Powell stated.

Powell indicated that the Federal Reserve's subsequent decision will be contingent, to some extent, upon whether escalating inflation or rising unemployment presents the more significant challenge.

He said that what they do next depends on how the situation develops. This could mean lowering interest rates or keeping them the same. They need to wait and see how things go before they decide.

Krishna Guha, a financial expert at EvercoreISI, proposed that the Federal Reserve's evaluation of current economic circumstances probably postpones the timeline for reducing interest rates. He stated, “The confluence of a balanced consideration of risks and the description of the economy as robust implies the Fed is not aiming to initiate a rate cut in June presently.” Numerous economists anticipate the Fed may not be inclined to cut until September.

In April, Trump imposed extensive tariffs on roughly 60 US trade allies, though most were suspended for 90 days, excluding those on China, whose goods are now subject to a 145% duty; the first high-level discussions between the two parties since Trump initiated this trade conflict are slated for this weekend in Switzerland.

The Federal Reserve's cautious stance could exacerbate tensions between the central bank and the Trump administration; President Trump reiterated his call for interest rate cuts in a recent interview, and while he has reportedly abandoned plans to dismiss Chairman Powell, this position might change should the economy falter.

When asked at the press conference if Trump's requests for lower interest rates affected the Federal Reserve, Powell stated, "It does not affect how we do our job at all. We will only ever consider the economic information, the future situation, and the balance of risks, and that is all."

Should the Federal Reserve reduce interest rates, it might decrease other borrowing expenses, like those for mortgages, vehicle loans, and credit cards, although this outcome is not assured.

A significant challenge confronting the Federal Reserve is determining the inflationary effect of tariffs, as economists and Fed officials widely anticipate these import taxes will elevate prices, although the extent and duration of this impact remain uncertain; while tariffs usually induce a singular price surge, they don't invariably lead to sustained inflation.

Currently, the U.S. economy appears largely robust, with inflation having significantly moderated since its height in 2022. Consumer spending remains brisk, although this might be partly driven by pre-tariff purchases of items such as vehicles. Businesses continue to steadily expand their workforces, maintaining a low unemployment rate.

However, there are signs that inflation will get worse in the next few months. Surveys of companies that make goods and companies that provide services show that they are paying more to their suppliers. Also, a survey by the Federal Reserve’s Dallas office found that almost 55% of manufacturing companies plan to make their customers pay for the higher costs from tariffs.