The Fed keeps interest rates steady as Powell warns that economic uncertainty is 'extremely elevated'

With signs of a slowing economy and amid looming tariff worries, the central bank chief said the risks of higher unemployment and inflation have risen

We may earn a commission from links on this page.
Image for article titled The Fed keeps interest rates steady as Powell warns that economic uncertainty is 'extremely elevated'
Photo: Kevin Dietsch (Getty Images)

The Federal Reserve said Wednesday that it would keep interest rates steady at 4.25-4.5%, as the central bank continues to work to balance persistent inflation concerns with signs of a slowing U.S. economy.

While inflation has cooled from its 2022 highs, recent data hasn’t provided sufficient assurance to begin reducing rates once again. But the Fed’s message was a little different this time around, warning of rising risks of both higher unemployment and inflation and raising the possibility of a stagflationary scenario.

Advertisement

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed said in a statement. “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”

Advertisement

Federal Reserve Chair Jerome Powell said in his own remarks that the central bank remains committed to price stability and full employment — saying he wanted to prevent a one-time increase in the price level from becoming an continuing inflation problem.

Advertisement

He said the risks of higher unemployment and inflation have risen, and the current policy stance leaves the Fed “well positioned” to address economic developments “in a timely way.”

U.S. stock prices fell Wednesday, but the Dow was able to cling to slight gains after the widely anticipated move. The S&P 500 fell 0.5% in the 15 minutes after the release, and U.S. Treasury yields extended their fall.

Advertisement

The Fed’s decision came against a backdrop of slowing economic growth and still-sticky inflation. The U.S. economy contracted by 0.3% in the first quarter of 2025, while the labor market showed resilience with 177,000 jobs added in April — a figure that only modestly exceeded expectations.

Core inflation, measured by the Fed’s preferred metric, the Personal Consumption Expenditures price index, continues to hover above the 2% target, reinforcing the Fed’s cautious stance.

Advertisement

“The economy itself is in solid shape,” Powell said. He added, though, to some laughs from reporters that “my gut tells me that uncertainty about the path of the economy is extremely elevated.”

Part of that is because of the sweeping set of tariffs President Donald Trump announced in early April, including a 145% duty on Chinese imports. While the Fed doesn’t directly weigh in on or set fiscal or trade policy, such developments will affect inflation dynamics going forward — and further complicate the Fed’s task.

Advertisement

Powell addressed tariffs in his press conference, saying the central bank will continue to “wait and see and watch” as the tariff policies change over the coming weeks and months. He said the Fed was comfortable in its policy stance and can move quickly when appropriate.

Now, he said, “It remains to be seen how these developments may affect future spending and investment.” Powell said, however, that if the current tariffs are sustained, they would affect inflation, economic growth, and employment levels. But “the effects on inflation could be short lived, reflecting a one-time shift in the price level.”

Advertisement

But the opposite could also be true.

“It is also possible that the inflationary effects could instead be more persistent,” Powell added. “Avoiding that outcome will depend on the size of the tariffs effects, on how long it takes for them to pass fully into prices and ultimately on keeping longer-term inflation expectations well anchored.”

Advertisement

One person who won’t be happy with Powell’s announcement: Trump. The president has called Powell a “major loser” and a “total stiff” and floated the idea of trying to fire the central bank chief — before walking that idea back.

Powell said Wednesday that Trump’s comments don’t affect his or the Fed’s job:

“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. We’re always going to consider only the economic data, the outlook, the balance of risks. And that’s it. That’s all we’re going to consider.

Advertisement

“So it really doesn’t affect either our job or the way we do it.”

Following the Federal Reserve stance and Powell’s coming remarks, analysts expect the Fed to continue to keep interest rates steady unless inflation data shows a clearer downward trend. Because the Fed said that policy remains in a good spot and that it isn’t in a hurry, the possibility for a interest rate cut is sky high.

Advertisement

The central bank said it will “continue to monitor the implications of incoming information for the economic outlook” and “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”