Fed holds interest rates steady as tariffs begin to drive some inflation

The Federal Reserve kept interest rates steady Wednesday, continuing its cautious approach as President Donald Trump’s trade war and stubborn inflation blur the path ahead.

Central bankers still expect to cut rates two more times this year, as they did a few months ago. But they have become slightly more cautious on other parts of the economy, according to a fresh set of economic projections released at the end of the Fed’s two-day meeting.

Officials now expect the economy to grow 1.7% this year, compared with an estimate of 2.1% they forecast in December. They penciled in an unemployment rate of 4.4%, up a tick from their last estimate of 4.3%. And officials estimate inflation will stay elevated, ending the year at 2.7%, instead of 2.5% from their last projections.

Officials will elaborate on their forecasts in the coming days and weeks. But in a group statement, they said that “uncertainty around the economic outlook has increased” and that they were paying attention to risks to inflation and the job market.

Fed Chair Jerome H. Powell said during a news conference that tariffs are already playing a role in driving inflation up, especially among goods that Americans and companies purchase. He said it will be difficult to accurately splice and dice instances in which tariffs are weighing on inflation, and where they aren’t. But that will be part of the Fed’s challenge moving forward.

“Goods inflation moved up pretty significantly in the first two months of the year,” Powell said. “Clearly some of it, a good part of it, is coming from tariffs.”

Powell spent much of the news conference talking about how the Fed will monitor the overall effects of the Trump’s policy changes, including on trade, immigration, fiscal policy and regulation.

“It is the net effect of these policy changes that will matter for the economy and for the path of monetary policy,” he said. “We do not need to be in a hurry to adjust our policy stance, and we are well positioned to wait for greater clarity.”

The Fed also announced that starting in April, it will slow the pace it reduces its vast balance sheet. By slowing this process down, the Fed can reduce the possibility of tumult in the financial markets in the face of a fight over the debt ceiling, which limits how much the government can borrow. Already, the Treasury Department is using “extraordinary measures” to stay below the debt limit. The Fed is essentially trying to keep the amount of money flowing into the banking system from dipping too low, too soon. (Fed Governor Chris Waller was the only official who wanted to keep the current pace, according to the Fed’s statement.)

Until now, Powell has refrained from divulging too much on what he thinks. In early March, he said that the Trump administration is overseeing “significant policy changes” in trade and other areas but that uncertainty about their overall economic effects “remains high.”

“As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” he said at an event hosted by the University of Chicago’s Booth School of Business. “We do not need to be in a hurry and are well positioned to wait for greater clarity.”

Later this year, officials will need to consider several options — including raising rates to bring down stubborn inflation, or cutting them to rev up the economy as in the face of rising tariffs.

“If you are the Federal Reserve, you can’t figure out if you go to the [brakes] because of price increases or the accelerator because of lost jobs,” former Treasury Secretary Larry Summers said Tuesday on X. He added that the Fed is in a “hard position,” because the “shock is both pushing up prices, in terms of imports, and reducing jobs, in terms of input costs. This is what tariffs do.”

Trump has announced and then paused tariff actions, and subsequently allowed some while promising even more “liberating” tariffs across a broad array of trade partners in the weeks to come. Economists expect that will weigh down the economy.

The tariff uncertainty has sent financial markets into tumult, as all three major stock indexes have lost much of the gains notched since Trump’s election, with uncertainty reigning. Stocks opened trading Wednesday slightly up.

If the economy remains strong but inflation does not continue to edge down toward the Fed’s target of 2%, the central bank could maintain higher interest rates for longer, Powell has said. But if the labor market weakens unexpectedly or inflation falls more quickly than anticipated, the Fed could lower rates.

“Our current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate,” Powell said during the Booth appearance this month, referring to the central bank’s commitment to achieving stable prices and full employment.

Fed policymakers in January paused additional rate cuts, saying they can afford to move cautiously. They are waiting for more progress on inflation, which has come down significantly from a few years ago but remains above the Fed’s goal. Prices rose less rapidly than expected in February, a report last week showed, but it’s still not clear what effect tariffs will have in the months to come.

The central bank already cut interest rates by a full percentage point between September and December of last year.