After Wednesday’s meeting, the central bank announced it would keep the federal funds rate, which banks use to borrow from one another overnight, between 4.25% and 4.5%. The Federal Reserve continues to wait for greater clarity about where the economy might be headed given all the changes to U.S. trade policy.   

“Uncertainty about the economic outlook has increased further,” the Fed said in a statement released Wednesday.

In another update from the March statement, the central bank said policymakers determined that risks to both higher unemployment and higher inflation had risen—creating the dreaded combination of stagflation.

Holding rates steady was almost entirely expected. Nearly all of Wall Street anticipated the Fed would stand pat on monetary policy as current economic data remains relatively strong. 

“The inflation picture remains elevated and sticky and unemployment continues to be relatively contained, so the Fed lacks the necessary ingredients to cut rates,” Chris Brigati, chief investment officer at Texas insurance and financial services company SWBC, wrote in a note Wednesday morning. 

Trump’s chaotic tariff rollout roiled markets early last month and has caused prominent measures of consumer sentiment to plunge. The latest edition of the Beige Book, a summary of economic activity and conditions from the Fed’s regional banks, emphasized “pervasive” uncertainty and a deteriorating outlook. 

These bad vibes have yet to spill over into what economists call the “hard data,” the key economic measures that dictate the Fed’s decisions. A stronger-than-expected April jobs report underlined the apparent resilience of the U.S. economy, which added 177,000 positions instead of the 135,000 the Street had expected. Meanwhile the unemployment rate remained unchanged at 4.2%. 

And while the Fed’s preferred measure of inflation came in at 2.3% in March, its lowest level since inflation surged to four-decade highs in 2021–2022, it remains above the central bank’s 2% target. Then there’s the potential impact of Trump’s tariffs. 

Fed Chair Jerome Powell has acknowledged the central bank would typically look through a one-time, or “transitory,” price increase from a tax hike on imports. In a speech last month at the Economic Club of Chicago, however, he said Trump’s recent tariffs would likely result in higher inflation and slower growth if they remained at their current levels. 

“For the time being, we are well positioned to wait for greater clarity before considering any adjustments to our policy stance,” he said. 

What will the Fed do next time?

Powell’s comments hinted at the worst-case scenario of stagflation, when inflation surges but unemployment also increases. Powell acknowledged that would put the Fed’s dual-mandate “in tension” as the central bank hikes interest rates to fight higher prices but lowers them to stimulate economic activity. 

“We continue to believe the Fed will prioritize protecting the labor market later this year, if and when the hard data turns,” Mike Sanders, head of fixed income at Madison Investments, wrote in a note Wednesday morning.

Going into Wednesday’s meeting, traders had priced in a 99% chance of the Fed keeping rates unchanged, according to the CME Group’s FedWatch tool. Fed funds futures have put a roughly 70% probability on the central bank doing the same thing in June and are pricing in two to four cuts by the end of the year. 

“The tariff situation is extremely fluid and unpredictable,” Brigati wrote, “therefore it would be irresponsible for the Fed to attempt to be responsive to tariffs when the situation can change drastically and their actions could lack the intended impacts or even worse compound a detrimental effect.” 

Powell has also noted this type of trade policy lacks modern precedent. The overall effective tariff rate in the U.S. is now 28%, its highest level since 1901, according to the Yale Budget Lab. 

The Trump administration has sent mixed messages about the prospect of trade deals in recent weeks, but Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer will meet with Chinese counterparts this week. It’s an initial step to potentially de-escalate tensions after the U.S. slapped a 145% tariff on most goods from China, prompting Beijing to retaliate with a 125% tax on U.S. imports.

Powell and the Fed have repeatedly been criticized by Trump, who has been adamant about wanting to lower borrowing costs for Americans. However, the President has recently backed off threats to fire the Fed chair, which spooked investors amid fears the central bank’s treasured independence could be under threat.