The Federal Reserve warned that the economy faced growing risks of higher unemployment and higher inflation due to tariff increases when officials agreed to hold interest rates steady on Wednesday.
“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment,” Fed Chair Jerome Powell said at a news conference.
Tariffs represent a shock that can decrease an economy’s ability to supply goods or services while sending up prices. The unpredictable rollout of increased duties on imported goods threatens to sap profits and chill new investment until businesses have more clarity on their underlying cost structure.
The policy changes pose a dilemma for the Fed, which has to decide whether to focus more on the potential for inflation to go up or more on the risk of rising unemployment.
“They’re in a bad situation,” said William English, a former senior Fed adviser. “If I were there, I would be suggesting that they stay put for now.”
President Trump backed off an implied threat to sack Powell last month, but continued hectoring the central bank leader to reduce rates. “We have a stubborn Fed,” Trump said in a television interview aired Sunday. “He should lower them. And at some point, he will.”
Expectations of a rate cut at the Fed’s next meeting in mid-June declined when Powell said officials felt like the costs of waiting to learn more about the economy were “fairly low.”
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