The Federal Reserve did not change its main interest rate on Wednesday, ignoring President Donald Trump's requests to lower borrowing costs. They also said that the risks 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, following three successive reductions late last year. While numerous economists and Wall Street participants anticipate rate cuts this year, the extensive tariffs implemented by Trump have introduced significant unpredictability into the U.S. economy and the central bank's strategy.

During a press conference after the policy statement came out, Chair Jerome Powell highlighted that the tariffs have reduced consumer and business confidence. However, he added that they haven't significantly hurt the economy yet. Powell also said that right now, there is too much uncertainty to know how the Federal Reserve should respond to these taxes.

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

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 make enough goods, like after the pandemic. On the other hand, more unemployment happens when the economy is weak, which typically means people spend less and prices don't go up as much.

When there is both high unemployment and fast-rising prices, it is called "stagflation." This situation worries central bankers a lot because it is difficult for them to fix both problems at the same time. The last time this happened for a long period was in the 1970s during the oil crises and economic problems.

However, most economists believe that Trump's wide-ranging tariffs could lead to stagflation. These import taxes might increase inflation by making imported goods and parts more expensive. At the same time, they could also increase unemployment because companies might cut jobs as their costs go up.

The Federal Reserve's objectives are to maintain price stability and achieve maximum employment. Typically, as inflation increases, the Fed elevates interest rates to curb borrowing and expenditure and moderate inflationary pressures, whereas if unemployment rises, it would decrease rates to stimulate increased spending and economic growth.

At the start of the year, experts and people who invest expected the Fed would lower its main interest rate two or three times this year because the rise in prices after the pandemic was still going down. Some economists also believe the Fed should cut rates now because they expect the economy to grow more slowly and unemployment to get worse due to the tariffs. But Powell was very clear that since the economy is doing well right now, the Fed can wait and do nothing.

Several months ago, many analysts thought the economy would have a "soft landing." This means inflation would finally go down to its goal of 2%, and unemployment would stay low while the economy grew well.

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

Should the tariffs be definitively implemented at those levels, Powell stated, "we would not witness further advancement towards our objectives." He added, "For the foreseeable future, perhaps the next year, we would not be making strides towards those goals, contingent on the tariffs' final form."

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

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

Krishna Guha, an analyst at EvercoreISI, suggested that the Federal Reserve's evaluation of current economic conditions probably delays the timing of a potential interest rate reduction. "The conjunction of the assessment acknowledging risks in both directions and the portrayal of the economy as robust implies the Fed isn't aiming to pave the way for a June rate cut at this point." Numerous economists anticipate the Fed might not be prepared to reduce rates until September.

In April, Trump unveiled extensive tariffs targeting approximately 60 U.S. trading partners, subsequently suspending the majority for a 90-day period, 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 inaugural high-level discussions since the commencement of Trump's trade dispute this weekend in Switzerland.

The central bank's reserved stance may intensify friction between the Fed and the Trump administration.

When questioned at the press conference about whether Trump’s requests for reduced rates influenced the Federal Reserve, Powell responded, “It has no impact whatsoever on how we perform our duties. We consistently base our decisions solely on economic data, the overall forecast, and the potential risks involved, and nothing else.”

A reduction in interest rates by the Federal Reserve could potentially decrease associated borrowing expenses, including those for mortgages, vehicle financing, and credit card balances, although this outcome is not a certainty.

A major problem for the Federal Reserve is figuring out how tariffs will affect inflation. Most economists and officials think these import taxes will make prices go up, but they aren't sure by how much or for how long. Tariffs usually cause prices to rise just once, not lead to continuous inflation.

Presently, the US economy largely exhibits robust health, and the rate of inflation has significantly moderated since its zenith in 2022. Consumer expenditure remains strong, though this could partially be attributed to preemptive purchases of items such as automobiles prior to the implementation of tariffs. Furthermore, businesses continue to recruit personnel at a consistent rate, resulting in a low level of unemployment.

However, several indicators suggest that inflationary pressures are likely to intensify in the near future, as evidenced by surveys revealing that both manufacturing and services companies are experiencing elevated costs from their suppliers. Additionally, a survey conducted by the Federal Reserve's Dallas branch indicated that almost 55% of manufacturing firms anticipate transferring the cost of increased tariffs to their clientele.