Federal Reserve Holds Interest Rates Steady Amid Uncertainty Over Trump’s Economic Policies

The Federal Reserve opted to keep interest rates unchanged on Wednesday as central bank officials assess the impact of President Donald Trump’s aggressive economic policies.

The decision, announced at the end of the Fed’s two-day monetary policy meeting, indicates that officials are awaiting clear signs that inflation is moving toward their 2% target or that the economy is slowing more than anticipated—two scenarios that could prompt rate cuts.

According to the latest economic projections released Wednesday, officials still anticipate lowering borrowing costs twice this year. However, eight officials now foresee either one or no rate cuts in 2024, compared to only four who held that view in December.

During a post-meeting press conference, Fed Chair Jerome Powell acknowledged the uncertainty facing American businesses and consumers, much of it linked to what he described as the Trump administration’s “turmoil.”

“It remains to be seen how these developments affect future spending and investment,” Powell said.

For now, the Fed’s benchmark borrowing rate remains between 4.25% and 4.5%. Powell noted that holding rates steady allows policymakers to monitor how Trump’s sweeping policy changes—such as tariffs, mass deportations, and a shrinking federal workforce—affect the U.S. economy.

In recent speeches, Fed officials have emphasized their willingness to adjust interest rates in either direction based on economic data.

Wednesday’s decision marks the second consecutive time the central bank has maintained borrowing costs.

Projections released by the Fed suggest the economy will be weaker than previously expected this year, with inflation running higher than anticipated.

As Trump’s administration pursues significant structural changes, Fed officials see the U.S. economy trending toward “stagflation”—a troubling mix of sluggish or negative growth and rising inflation. Whether the country enters a full-blown stagflationary period, last seen in the 1970s, remains uncertain.

All 12 voting Fed officials supported Wednesday’s decision to hold rates steady, though Fed Governor Christopher Waller dissented on the separate decision to slow the pace of reducing the central bank’s balance sheet.

Powell on Trump’s Economic Policies

Trump’s economic policies pose a major challenge for the Fed due to their broad and uncertain effects. During the press conference, Powell faced numerous questions about how the Fed is factoring in the president’s policy shifts.

Trump’s tariffs could fuel inflation and dampen economic growth, while his immigration crackdown may create labor shortages in key industries. His mass layoffs of federal employees could push some local economies into recession, but his deregulation efforts and extension of 2017 tax cuts might spur growth. The overall impact of Trump’s policies on growth, inflation, and the labor market remains unclear.

Powell noted that Trump’s tariffs contributed to the Fed’s higher inflation projections for this year, though he acknowledged the difficulty in determining exactly how much inflation is attributable to the trade war.

Following the Fed’s announcement, Trump urged policymakers to cut interest rates as tariffs take effect.

“The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy,” Trump wrote on Truth Social, referring to April 2—when reciprocal tariffs are set to go into effect—as “Liberation Day in America.”

Earlier this month, Powell reiterated that the Fed would be guided by economic data rather than forecasts. He pointed to signs of a slowdown in consumer spending.

A Strong Labor Market Offsets Economic Concerns

Despite concerns about consumer spending, the labor market remains a pillar of strength for the economy.

In February, the unemployment rate stood at 4.1%, with employers adding 151,000 jobs. Weekly jobless claims, often an early indicator of labor market shifts, remain at historically low levels.

Powell highlighted the labor market’s resilience as a key factor supporting the economy. However, he cautioned that any unexpected deterioration could prompt the Fed to resume rate cuts sooner.

“Labor market conditions are solid,” Powell said.

When asked about the risk of a recession, Powell downplayed concerns, noting that while some economists have raised their odds of an economic downturn, the risk remains moderate.

“Forecasters have generally raised—a number of them have raised—their possibility of a recession somewhat. But still at relatively moderate levels,” Powell said. “If you go back two months, people were saying that the likelihood of a recession was extremely low. So it has moved, but it’s not high.”

America’s Economic Mood and Its Impact on Spending

While economic data remains strong, sentiment surveys indicate a growing pessimism among businesses and consumers—a trend Powell acknowledged during Wednesday’s press conference.

Trump’s policy agenda has already influenced “soft data” measures, such as consumer and business sentiment surveys. However, Powell noted that the relationship between sentiment and actual economic activity is not always clear.

“There are times people are saying very downbeat things about the economy and then going out and buying a new car,” Powell remarked.

Despite the strong labor market, Americans are increasingly concerned about inflation. The University of Michigan’s latest consumer survey showed rising long-term inflation expectations. If these expectations continue to climb, the Fed may be forced to reconsider its stance on interest rates.

During Trump’s first trade war in 2018, inflation expectations were a major factor in the Fed’s decision to consider rate hikes, according to declassified policy documents known as the “teal book.”

Powell, however, suggested that long-term inflation expectations remain stable, citing data from the New York Fed.

The Michigan consumer survey for March recorded the largest month-over-month jump in five-to-ten-year inflation expectations since 1993. Even so, Powell dismissed concerns over the recent spike in short-term inflation expectations.

“You would expect that expectations of inflation over the course of a year would move around because conditions change,” he said. “And in this case, we have tariffs coming in. We don’t know how big. There are so many things we don’t know.”

Looking Ahead

The Fed’s decision to keep rates unchanged reflects a cautious approach amid uncertainty over Trump’s economic policies.

With the economy showing mixed signals—strong employment but slowing consumer spending—central bankers are navigating a complex landscape. Inflation remains a key concern, especially as Trump’s tariffs roll out.

As the year progresses, the Fed will closely monitor economic data to determine whether rate cuts are necessary. The path ahead remains uncertain, with Trump’s policies introducing new variables into an already delicate economic environment.