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 chances of both more unemployment and higher inflation have gone up. This is an unusual situation that makes things difficult for the central bank.

Following three consecutive rate reductions late last year, the Federal Reserve maintained its rate at 4.3% for the third consecutive meeting. While numerous economists and Wall Street investors continue to anticipate a rate decrease this year, the broad tariffs implemented by Trump have introduced significant uncertainty into the U.S. economy and the central bank's policy considerations.

Following the issuance of the policy statement, Chair Jerome Powell highlighted during a press conference that the tariffs have negatively impacted consumer and business confidence but have not yet demonstrably damaged the economy. Currently, Powell stated, there is excessive ambiguity to ascertain the appropriate response of the Federal Reserve to these duties.

Powell stated, "Should the substantial tariff hikes that have been declared persist, they are probable to trigger an escalation in inflation, a deceleration in economic expansion, and a surge in unemployment." He further noted that these effects could be fleeting or enduring.

It's not common for the Federal Reserve to worry about both higher prices and more people losing their jobs at the same time. Usually, prices go up when people are spending a lot and companies can't keep up with the demand, so they charge more, like after the pandemic. On the other hand, more people lose their jobs when the economy is weaker, which typically means people spend less and prices don't go up as fast.

When high unemployment and high inflation happen at the same time, it's often called "stagflation." This situation worries central bankers a lot because it's difficult for them to fix both problems at once. The last time this happened for a long period was in the 1970s during the oil crises and economic problems.

However, many economists believe that Trump's wide-ranging tariffs could lead to stagflation. They say these import taxes might increase inflation because imported goods become more expensive, and also increase unemployment as companies cut jobs to handle higher costs.

The Federal Reserve's primary objectives are to maintain price stability and maximize employment. Conventionally, when inflationary pressures mount, the Fed hikes interest rates to curb borrowing and expenditure, thereby mitigating inflation, whereas if unemployment escalates, it would reduce rates to stimulate greater spending and economic expansion.

Early in the year, analysts and investors anticipated the Federal Reserve would lower its benchmark interest rate two or three times this year, given the continued moderation of the post-pandemic inflation surge. Some economists further contend the Fed ought to preemptively decrease rates in expectation of decelerating growth and escalating unemployment stemming from tariffs. Nevertheless, Powell firmly maintained that, with the current robust state of the economy, the Fed is positioned to remain inactive.

A few months ago, many analysts also thought the economy would have a "soft landing," meaning inflation would finally fall to its 2% goal, and unemployment would stay low with strong growth.

Nevertheless, on Wednesday Powell suggested that outcome had become less probable.

If the tariffs are put in place at those levels, then we will not make more progress towards our goals, Powell said. At least for the next year, for example, we would not be making progress towards those goals – again, if that is how the tariffs turn out.

Powell further stated that the Federal Reserve's subsequent action will be partly contingent upon which economic metric deteriorates more significantly: inflation or unemployment.

He said that depending on how the situation develops, they might lower interest rates or keep them the same. He added that they need to wait and see what happens before deciding.

Krishna Guha, an analyst at EvercoreISI, suggested that the Federal Reserve's appraisal of present economic circumstances probably defers the timing of an interest rate reduction. He remarked, "The convergence of the bidirectional risk evaluation and the portrayal of the economy as robust implies the Fed is not aiming to initiate a rate cut in June currently." Numerous economists anticipate the Fed may not be prepared to make such a move until September.

In April, Trump unveiled extensive tariffs targeting approximately 60 U.S. trading partners, subsequently suspending the majority for 90 days, with the notable exception of those imposed on China. The administration has levied a substantial 145% tariff on Chinese goods. The two nations are slated to conduct their initial high-level discussions since Trump initiated the trade dispute this weekend in Switzerland.

The central bank's circumspection could precipitate further friction between the Federal Reserve and the Trump administration. President Trump has repeatedly advocated for the Fed to reduce interest rates, reiterating this stance in a recent television interview. While Trump has previously contemplated dismissing Chairman Powell, he has since refrained, though this possibility could be revisited should the economy falter in the ensuing months.

When asked at the press conference if Trump's requests for lower interest rates influenced the Fed, Powell replied, "It doesn't affect how we do our job at all. We will only ever consider the economic information, the future situation, the possible dangers, and that's all."

Should the Federal Reserve implement interest rate reductions, it has the potential to decrease various other borrowing expenses, including those for mortgages, vehicle financing, and credit card debt, though this outcome is not assured.

A big problem for the Fed is how tariffs will affect inflation. Most economists and Fed officials think these import taxes will make prices go up, but they don't know exactly how much or for how long. Tariffs usually cause prices to rise just once, not keep going up over time.

Presently, the U.S. economy largely exhibits robustness, with inflation having significantly moderated since its zenith in 2022. Consumer spending remains vigorous, although this may partially stem from anticipatory purchases of items such as automobiles prior to the implementation of tariffs. Furthermore, businesses are consistently expanding their workforce, contributing to sustained low unemployment rates.

However, it seems inflation will get worse soon. Surveys of factories and service companies show they are paying more to their suppliers. Also, a survey by the Federal Reserve in Dallas found that almost 55% of factories plan to make customers pay for the higher costs from tariffs.