'It's Not At All Clear What We Should Do': Fed Holds Rates Flat As Tariffs Seep Through Economy

Officials at the Federal Reserve on Wednesday resisted pressure from the White House and left the central bank’s benchmark interest rate unchanged — but also warned of worsening economic indicators and deepening uncertainty.

This week's meeting is the third in a row at which the Fed has opted not to cut the federal funds rate, the outcome expected by most analysts despite general concern about the economy.

“The risks of higher unemployment and higher inflation have risen, but they haven't materialized yet. They're really not in the data yet,” Fed Chair Jerome Powell said at a press conference following the decision. “I think it's obvious, actually, that the right thing for us to do is wait. We're in a good place.”

The unanimous decision comes as President Donald Trump’s economic policies have upended a nascent postpandemic recovery across the office, multifamily, industrial and retail markets.

“For the core four, it’s now much more of a wait-and-see pattern,” Moody’s Senior Economist Ermengarde Jabir said. “More than the interest rates, the policy uncertainty is moving sectors or, in many cases, keeping things at a standstill.”

Powell warned of negative impacts stemming from Trump's tariff policies, which have sent shockwaves through markets and led to project delays and increased costs.

“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,” Powell said. 

The Fed chairman said it remained unclear whether tariffs would result in one-time price increases or more persistent inflation. The outcome would be determined by the scope of tariffs, which have been rolled out and pulled back rapidly, clouding the path forward, he said.

“It’s really not at all clear what we should do,” Powell said.

Powell has repeatedly said the central bank makes decisions based on hard data like the unemployment rate and not soft data like the consumer confidence reports that have been flashing warning signs.

A strong jobs report in early May that defied expectations with 177,000 jobs added largely convinced investors that the Fed would opt to keep rates flat. Only 3% of investors expected a cut to the benchmark rate this week, according to CME Group’s FedWatch tool.

“The labor market is solid, inflation is low, we can afford to be patient as things unfold,” Powell said. “There's no real cost to our waiting at this point.”

Powell has faced bruising criticism from Trump over his decision not to cut interest rates in March. The president has accused the head of the central bank of making politically motivated decisions, although he has waved off rumors that he might try to replace Powell, whose term ends in May 2026.

Powell said the president’s comments had no bearing on the Fed’s decision-making. 

“We're always going to do the same thing, which is we're going to use our tools to foster maximum employment and price stability for the benefit of the American people,” he said.

Trump lambasted the Fed's decision in an early morning post to Truth Social Thursday, calling Powell a fool "who doesn't have a clue." 

"Other than that, I like him very much!" he said. "Oil and Energy way down, almost all costs (groceries and “eggs”) down, virtually NO INFLATION, Tariff Money Pouring Into the U.S. — THE EXACT OPPOSITE OF “TOO LATE!” ENJOY!"

The tariff battle and trade war are squeezing economic growth as Powell and the other Fed governors continue their attempts to stick the so-called economic soft landing, the longstanding policy goal that would combine inflation of around 2% with strong employment figures. 

Powell said the tariffs introduced on April 2 exceeded what the Fed had forecast, adding that negotiations between the White House and trade partners would be crucial in determining their broader impact. 

“For the administration, this is their mandate, not ours,” Powell said. “As you can see, they’re beginning to have talks with many nations, and that has the potential to change the picture materially. So we just have to wait and see.” 

But inflation remains stubbornly above its 2% target, and high tariffs like the 145% levy in place on Chinese imports threaten to push up prices and leave store shelves empty.

The Fed’s decision Wednesday to hold the benchmark federal funds rate between 4.25% and 4.5% is unlikely to have much bearing on commercial real estate markets, which have already been grappling with impacts from the trade war. 

“With the April 2 tariff announcements, and then many of the policies being put on pause for 90 days, I don't think that Fed policy is going to be able to counterbalance this short-term, 30-, 60-, 90-day uncertainty,” Jabir said. 

Economic growth turned negative in the first quarter, its worst performance since the early pandemic recovery in 2022, after posting a 2.4% annualized growth rate to end the year.

But unemployment remains low at 4.2%, and consumer spending, which accounts for more than two-thirds of economic activity, ticked up 1.8% in the first quarter. While a steep decline from the 4% growth seen in the fourth quarter, the healthy level of growth has kept the Fed from easing monetary policy further.

Powell and Fed officials have taken pains to avoid appearing political. The chairman brushes off reporters’ questions related to the president at every Federal Open Market Committee meeting.

But the central bank would have to take aggressive action out of line with historical precedent to offset the impacts of the White House’s shifting trade declarations, Jabir said.  

“In a hypothetical world where Fed policy, central bank policy, monetary policy would counterbalance the uncertainty, they would have to pull the levers extremely hard,” she said. “They are looking long-term, so that wouldn't make any sense to do.”

Powell declined to comment during the press conference on the number of cuts that were likely to come this year. 

“Depending on the way things play out, that could include rate cuts, it could include us holding where we are,” he said. “We just are going to need to see how things play out.”

UPDATE, MAY 7, 6:06 P.M. ET: This story has been updated with comments from Federal Reserve Chair Jerome Powell.

UPDATE, MAY 8, 8:55 A.M. ET: This story has been updated to incorporate Trump's comments after the decision on rates was announced.