The Federal Reserve did not change its main interest rate on Wednesday, ignoring President Donald Trump's requests to lower costs for borrowing money. They also said there is a higher chance of both more people losing their jobs and prices going up faster. This is an unusual situation that makes things difficult for the central bank.

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

At a press conference following the release of the policy statement, Chair Jerome Powell emphasised that the tariffs have diminished consumer and business confidence, though their tangible impact on the economy remains limited thus far. Powell stated that the present climate is marked by excessive uncertainty, precluding a clear determination of how the Federal Reserve should respond to these duties.

Powell stated that if the significant increases in tariffs that have been announced continue, they will probably lead to higher inflation, slower economic growth, and more unemployment. He also mentioned that these effects might be temporary or last for a longer time.

It is not common for the Federal Reserve to have to deal with both rising prices and more people losing their jobs. Usually, inflation goes up when people are spending a lot and companies cannot make enough products, so they increase prices, like after the pandemic. On the other hand, unemployment goes up when the economy is not strong, which usually means people spend less and inflation goes down.

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

However, many economists believe that Trump's wide-ranging tariffs could cause stagflation. These taxes on imports might increase inflation by making imported parts and finished goods more expensive. At the same time, they could lead to higher unemployment because companies might cut jobs as 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 temper borrowing and expenditure and curb inflationary pressures, whereas if job losses increase, it would reduce rates to stimulate greater spending and economic expansion.

Earlier this year, analysts and investors anticipated the Federal Reserve would lower its benchmark interest rate a couple of times, predicting that the post-pandemic surge in inflation would continue to subside.

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 as the economy grew well.

However, on Wednesday, Powell indicated that the attainment of such an outcome was becoming less probable.

If these tariffs are finally put in place at the planned levels, we probably won't make more progress towards our goals, Powell said. He added that for at least the next year, we wouldn't expect to make progress towards those goals, if that's how the tariffs turn out.

Powell also stated that the Federal Reserve's subsequent action would be partially contingent upon whether inflation or unemployment deteriorates more significantly.

“Depending on how circumstances unfold, it might involve reductions in interest rates, or it could mean we maintain our current position; we need to observe how events develop before making such determinations,” he stated.

Krishna Guha, an analyst at EvercoreISI, suggested that the Federal Reserve's appraisal of the present economic climate probably delays the timing of a potential interest rate reduction. He remarked, "The amalgamation of the dual-sided risk evaluation and the portrayal of the economy as robust indicates that the Fed is not aiming to initiate a June rate cut at this moment." Numerous economists anticipate that the Fed might not be prepared to implement a cut until September.

In April, Trump declared extensive tariffs on approximately 60 US trading partners, subsequently suspending the majority for 90 days, excluding those imposed on China. The administration has levied a 145% tariff on Chinese goods. The initial high-level discussions between the two nations since Trump initiated the trade dispute are slated for this weekend in Switzerland.

The central bank's careful approach could cause more disagreement between the Federal Reserve and the Trump administration. This is especially true after Trump recently asked for lower interest rates on television. Although Trump has stopped threatening to fire the head of the Fed, he might think about it again if the economy has problems in the next few months.

At the press conference, when asked if Trump's calls for lower rates influenced the Fed, Powell stated, "It doesn't affect how we do our job at all. We will always only consider the economic data, the future outlook, and the balance of risks, and that is all."

A reduction in interest rates by the Federal Reserve might decrease other borrowing expenses, like those for mortgages, car loans, and credit cards, although this outcome is not assured.

A significant challenge for the Federal Reserve lies in assessing the inflationary impact of tariffs; while most economists and officials anticipate these import taxes will raise prices, the magnitude and duration of this effect remain uncertain, as tariffs usually lead to a singular price hike rather than sustained inflation.

Currently, the US economy appears largely robust, with inflation having significantly abated since its high point in 2022. Consumer spending remains vigorous, although this could partially stem from pre-tariff purchases of items such as automobiles. Businesses continue to expand their workforce consistently, and unemployment remains low.

Nonetheless, there are indications inflation is likely to intensify in the ensuing months. Surveys of manufacturing and services companies reveal they are encountering increased costs from their providers. Furthermore, a Federal Reserve survey conducted by its Dallas branch indicated that close to 55% of manufacturing firms anticipate transferring the effect of tariff hikes onto their clientele.