The Federal Reserve said Wednesday it was leaving interest rates unchanged — but warned uncertainty about the trajectory of the economy was increasing, in part because of fears about the impact from President Donald Trump’s tariffs strategy.
The Fed said its key federal funds rate, which serves as a benchmark for interest rates throughout the economy, would remain at approximately 4.5%.
Though it said current economic conditions were solid, the central bank lowered its forecast of gross domestic product, a measure of the total value of all goods and services produced within the U.S., for the rest of the year from 2.1% in December to 1.7%. It also warned that a key measure of inflation would now be closer to 3% than 2%.
Eighteen out of 19 policymakers now say there is increased risk that GDP will fall, compared with just five in December.
Meanwhile, 11 policymakers now say the unemployment rate could climb to as much as 4.5% this year, compared with only five previously.
“Uncertainty around the economic outlook has increased,” the Fed’s statement said.
Federal Reserve Board Chairman Jerome Powell during a hearing on Capitol Hill in Washington D.C., on Feb. 12, 2025.Jose Luis Magana / AP
In his press conference following the release of the statement, Fed Chair Jay Powell said the exact relationship between Trump’s tariffs strategy and stronger near-term price growth was not totally clear given other trends in the economy.
But the tariffs are certainly a factor in rising expectations that price growth will accelerate, he said — though for now, firmer inflation would likely be “transitory.”
“Inflation has started to move up now, we think, partly in response to tariffs and there may be a delay in further progress in the course of this year,” Powell said.
A host of indicators, not to mention comments from Trump administration officials themselves, suggest that consumer spending and employers’ hiring are both slowing. After an initial burst of optimism upon Trump’s election, growth now looks to be more subdued. Meanwhile, federal workforce cuts by Elon Musk’s Department of Government Efficiency have also raised concerns about pressure on local economies, not to mention the ability of newly jobless workers to receive unemployment assistance.
“The Fed is as lost in the wilderness as the rest of us trying to decipher the continual shifts in economic policy from 1600 Pennsylvania Avenue,” Omair Sharif, managing director of Inflation Insights consultancy, said in a note to clients following Wednesday’s release.
The sweeping changes sought by the White House have also heightened uncertainty among investors. Last week, the S&P 500 slipped into correction territory, marking a 10% drop from its latest peak, for the first time in three years.
As surveys suggest consumer and business confidence is tanking, Trump and senior officials have changed their messaging since the campaign, warning consumers to brace for potential economic pain and declining to rule out the possibility of a recession. Trump has signaled the economy may be in for a period of “transition” as his policies take effect, while Treasury Secretary Scott Bessent recently said the U.S. must “detox” from its reliance on public spending.
The upheaval has created a more difficult backdrop for the Federal Reserve to navigate as it sets borrowing rates for the U.S. The central bank is charged by Congress with helping keep both unemployment and inflation low. Right now, both are fairly subdued. Yet, there are signs they are set to rise as the Trump administration looks to slash government agencies and impose steep new tariffs that major businesses have already warned shoppers could pay for.
Multiple analysts noted the Fed’s latest outlook signals the prospect of stagflation — higher inflation despite lower overall growth — though the levels for both would remain far below the 1970s stagflationary shock caused by that decade’s oil crisis
“Revisions to [policymakers’] projections had a somewhat “stagflationary” feel with forecasts for growth and inflation moving in opposite directions,” Goldman Sachs managing director Whitney Watson said in a note Wednesday afternoon. “For the time being the Fed is in wait and see mode, as it monitors whether the recent growth slowdown develops into something more serious.”
Seema Shah, chief global strategist at Principal Asset Management, called the revised projections a “stagflationary shift.”
“With the economy confronting a litany of challenges, the Fed focus is set to shift to the full employment side of its dual mandate. Indeed, the Fed projection that inflation will come back down fairly rapidly in 2026 suggests that they expect inflation expectations to remain anchored and, therefore, that rate cuts will be necessary in the near future — they just need a full set of information to give them the green light.”
On the other hand, Inflation Insights’ Sharif said the fact that the Fed still only sees two rate cuts this year suggests the central bank will adopt a more “hawkish” stance, meaning it will err on the side of seeking to control price growth even if it means slightly higher unemployment.
He said the situation was reminiscent of the growth scare of 2022, in which the Fed decided to not signal rate cuts were forthcoming because inflation remained elevated.
“The Fed saw downside risks to growth and upside risks to unemployment, but they continued to power ahead with rate hikes,” Sharif said of the moment the central bank faced three years ago.
“They’re saying now that they will err on the side of making sure inflation does not get out of hand again, especially with some surveys showing inflation expectations moving higher.”
