The Federal Reserve kept its key interest rate unchanged Wednesday, brushing off President Donald Trump’s demands to lower borrowing costs, the Associated Press reports. The central bank said that the risks of both higher unemployment and higher inflation have risen, an unusual combination that puts the central bank in a difficult spot.
The Fed kept its rate at 4.3% for the third straight meeting after cutting it three times in a row at the end of last year. Many economists and Wall Street investors still expect the Fed will reduce rates this year, but the sweeping tariffs imposed by Trump have injected a tremendous amount of uncertainty into the U.S. economy and the central bank’s policies.
During a press conference after the release of the policy statement, Chair Jerome Powell underscored that the tariffs have dampened consumer and business sentiment but have yet to noticeably harm the economy. At the moment, Powell said, there’s too much uncertainty to say how the Fed should react to the duties.
It is unusual for the Fed to face the risk of both higher prices and more unemployment. Typically, rising inflation occurs when consumers are spending freely and businesses, unable to meet all the resulting demand, raise their prices instead, as happened after the pandemic. Meanwhile, increasing unemployment occurs in a weaker economy, which usually slows spending and cools inflation.
A combination of both higher unemployment and steeper inflation is often referred to as “stagflation” — and it’s hard for the Fed to address both challenges. It last occurred on a sustained basis during the oil shocks and recessions of the 1970s.
