Federal Reserve Chair Jerome Powell took the podium in August with an optimistic outlook that contrasted with the snow-capped mountains depicted on the curtains behind him.
Announcing the central bank’s plan to begin cutting interest rates, Powell declared an end to its prolonged fight against pandemic-era inflation. “The time has come,” he told the audience at a conference in Jackson Hole, Wyoming, highlighting a steady decline in price increases.
Months later, however, economic uncertainty has complicated the Fed’s approach, clouding the outlook for inflation and interest rates. He told hawk24news
President Donald Trump’s tariffs have disrupted markets, fueled recession concerns, and intensified worries about inflation. While Trump has paused or reversed some tariffs, the shifting policy has only added to the uncertainty, the experts noted.
On Wednesday, policymakers, business leaders, and everyday borrowers will look to the Fed for its latest interest rate decision—the first since Trump took office.
“The Fed is in a tough position,” said Wendy Edelberg, director of the Hamilton Project and senior fellow in economic studies at the left-leaning Brookings Institution. “We have all of the potential negative effects of tariffs, but we also have extraordinary uncertainty.”
Earlier this month, the Trump administration imposed 25% tariffs on goods from Mexico and Canada, though the White House soon delayed some of them by a month. A new round of duties on Chinese imports doubled an initial set of tariffs imposed just a month earlier.
Steel and aluminum tariffs last week triggered retaliatory measures from Canada and the European Union, adding to countermeasures already in place from China.
Despite these challenges, the economy remains resilient by key measures. A recent jobs report showed strong hiring and a historically low unemployment rate. Inflation, while well below its 2022 peak, still sits nearly a percentage point above the Fed’s 2% target.
However, experts warn that tariffs could threaten both of the Fed’s primary objectives: controlling inflation and maximizing employment.
Economists widely agree that tariffs drive inflation higher, as exporters often pass on the added costs to consumers through price hikes. A University of Michigan survey released last week found that consumers expect inflation to rise from 2.8% to 4.9% over the next year—a significant jump from February’s findings.
“There will be a price impact,” said Yeva Nersisyan, an economics professor at Franklin & Marshall College.
Tariffs also pose a risk to economic growth and employment. Higher costs for imported raw materials could squeeze domestic businesses, while retaliatory tariffs may make U.S. goods less competitive abroad, some experts warned.
Goldman Sachs recently increased its estimated likelihood of a recession within the next year from 15% to 20%, while Moody’s Analytics placed the chances at 35%.
“There’s a risk that the economy does roll over and fall into a recession,” said William English, a finance professor and former Federal Reserve economist. “The Fed probably sees an upside risk to inflation and a downside risk to employment. They’ll have to balance those as they consider both policies.”
The Trump administration has largely avoided ruling out the possibility of a recession. Speaking at the White House last week, Trump said a “little disturbance” may be necessary to revitalize domestic production and restore well-paying manufacturing jobs.
This uncertain economic landscape presents a dilemma for the Fed. Raising interest rates to counteract potential tariff-induced inflation could dampen borrowing and slow growth. On the other hand, cutting rates to stimulate the economy could spur inflation.
“If we were in an environment where inflation was to rise consistently while growth slowed and unemployment increased, that’s a real challenge for the Fed,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed official.
For now, the Fed’s primary challenge is the sheer range of possible economic outcomes. Given the prevailing uncertainty, experts expect the central bank to hold off on major policy shifts until more clarity emerges.
Investors overwhelmingly anticipate that the Fed will leave rates unchanged on Wednesday, according to the CME FedWatch Tool, which tracks market expectations.
“For now, the Fed probably sees waiting as the best approach,” Nersisyan said.