On Wednesday, the Federal Reserve decided not to change its main interest rate, ignoring President Donald Trump’s requests to lower borrowing costs. They also said that the chances of both more unemployment and faster inflation have increased. This is an unusual situation that makes things difficult for the central bank.

The Federal Reserve maintained its interest rate at 4.3% for the third consecutive meeting, having previously lowered it three times successively at the close of the previous year. While numerous economists and Wall Street financiers anticipate the Fed will decrease rates this year, the extensive tariffs implemented by Trump have introduced considerable unpredictability into the U.S. economy and the central bank's strategic decisions.

During a press conference subsequent to the policy statement's publication, Chair Jerome Powell emphasized that the tariffs have negatively impacted consumer and business confidence, though they have not yet significantly damaged the economy. Currently, Powell indicated, the level of uncertainty is too high to determine the appropriate Federal Reserve response to these duties.

Powell stated that if the substantial tariff hikes persist, they are likely to trigger increased inflation, slower economic growth, and higher unemployment, noting these effects could be either temporary or prolonged.

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 businesses can't keep up, so they charge more, like after the pandemic. On the other hand, more unemployment usually happens when the economy is not strong, which means people spend less and prices don't go up as fast.

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

However, most economists agree that Trump's tariffs could lead to stagflation. These import taxes might increase inflation because imported goods and parts become more expensive. At the same time, they could cause companies to cut jobs as their costs go up, which would increase unemployment.

The Federal Reserve aims to maintain price stability and achieve maximum employment. Usually, in response to increasing inflation, the Fed raises interest rates to curb borrowing and spending, thereby moderating inflation. Conversely, if unemployment rises, the Fed tends to lower rates to stimulate increased spending and economic growth.

At the start of the year, analysts and investors projected the Federal Reserve would lower its primary interest rate two or three times this year, as the inflationary surge that succeeded the pandemic continued to abate. Some economists likewise contend the Fed ought to reduce rates in anticipation of decelerating growth and rising unemployment stemming from the tariffs. However, Powell maintained unequivocally that, given the current robust state of the economy, the Fed is positioned to remain inactive.

A few months ago, many experts also thought the economy would have a "soft landing." This means inflation would finally go down to the 2% goal, and unemployment would stay low because of strong growth.

However, on Wednesday, Powell indicated that achieving this outcome was becoming less probable.

"If the tariffs are eventually implemented at those stipulated rates ... then we will not achieve further headway towards our objectives," Powell stated. "At least for the forthcoming year, we would fail to make progress towards those objectives -- contingent, once again, on how those tariffs ultimately transpire."

Powell also said the Fed's next decision will depend partly on whether inflation or unemployment gets worse the most.

He said that what they do next, like cutting interest rates or keeping them the same, depends on how things develop, so they need to wait and see before deciding.

Krishna Guha, an analyst at EvercoreISI, believes the Federal Reserve's view of the current economy means they will likely cut interest rates later. He said that because the Fed sees risks on both sides and describes the economy as strong, they probably won't cut rates in June now. Many economists now think the Fed might wait until September to cut rates.

In April, Trump declared extensive tariffs on approximately 60 U.S. trading partners, subsequently suspending most for 90 days, except for those applied to goods from China, which face a 145% tariff.

The central bank’s measured approach risks exacerbating tensions between the Federal Reserve and the Trump administration. On Sunday, President Trump reiterated his call for interest rate reductions in a television interview. While President Trump has previously refrained from pursuing attempts to dismiss Federal Reserve Chair Powell, this stance may be re-evaluated should the economy falter in the near future.

When questioned at the press conference about the influence of Trump's calls for lower rates on the Federal Reserve, Powell stated, "It absolutely does not impact our work. We consistently evaluate solely the economic data, the future prospects, the risk assessment, and nothing further."

A potential reduction in interest rates by the Federal Reserve might lead to decreased borrowing costs across various sectors, including mortgages, vehicle financing, and credit card debt, although this outcome is not assured.

A significant challenge confronting the Federal Reserve is to ascertain the impact of tariffs on inflation. While most economists and Fed officials anticipate these import duties will lead to higher prices, the precise extent and duration remain uncertain. Tariffs generally result in a discrete price increase rather than persistent inflationary pressures.

Presently, the US economy largely demonstrates robustness, with inflation having notably subsided from its 2022 zenith. Consumer expenditure maintains a vigorous momentum, potentially influenced by preemptive purchases such as vehicles prior to impending tariffs. Concurrently, businesses continue to expand their workforce at a consistent rate, contributing to a low unemployment level.

However, there are indications that inflation will escalate in the foreseeable future, as evidenced by surveys of manufacturing and services companies revealing increasing costs from their suppliers and a Federal Reserve survey indicating that a significant majority of manufacturing firms anticipate transferring the burden of tariff hikes to consumers.