Fed leaves key rate unchanged as it awaits the impact of tariffs and Trump again scolds Powell

So far inflation has continued to decline this year while some cracks have appeared in the economy, particularly in housing, where elevated borrowing costs are slowing sales and homebuilding. And Trump, earlier Wednesday, renewed his condemnation of Chair Jerome Powell for not sharply reducing borrowing costs.

Yet Powell underscored that the Fed does expect Trump's sweeping tariffs to push up prices by the end of this year and the central bank wants to hold off on any moves until the impact of the duties becomes clearer.

“We have to be forward looking,” Powell said. "We expect a meaningful amount of inflation to arrive in coming months and we have to take that into account. Because the economy is still solid, we can take the time to actually see what’s going to happen.”

Fed officials see inflation, according to their preferred measure, rising to 3% by the end of this year, from 2.1% in April. It also projects the unemployment rate will rise to 4.5%, from 4.2% currently. Growth is expected to slow to just 1.4% this year, down from 2.5% last year.

Some Fed policymakers have expressed particular concern that the duties could boost prices, creating another surge of inflation just a couple of years after the worst inflation spike in four decades. Many economists say that without the higher import taxes, the Fed would likely be cutting its rate further.

Yet so far, inflation has cooled this year to just 2.1% in April, essentially back at the central bank's target of 2%. Core inflation, which excludes the volatile food and energy categories, remains elevated at 2.5%.

At a press conference after the Fed released its latest policy statement, Powell said, “Increases in tariffs this year are likely to push up prices and weigh on economic activity.” He added, however, that the extent of the impact depends on the size and duration of the tariffs. The “pause” Trump put in place on many of the tariffs is set to end on July 9, pending any deals the administration strikes with its trading partners.

“We don’t yet know with any confidence where (the tariffs) will settle out,” he said.

Trump has pointed to the mild inflation figures to argue that the Fed should lower borrowing costs and has repeatedly criticized Powell for not doing so. On Wednesday he called Powell “stupid” and accused him of being “political” for not cutting rates.

Powell continued to stress that the current strength in the economy allows the Fed to be patient as he spoke with reporters.

“We’ll make smarter and better decisions if we wait just a couple of months or however long it takes to get a sense of what is really going to pass through to inflation.”

Trump has previously argued that a rate cut would boost the economy. Now his focus has shifted to the federal government’s borrowing costs, which have shot higher since the pandemic, with interest payments running at an annual rate of more than $1 trillion.

Pushing the Fed to cut rates simply to save the government on its interest payments typically raises alarms among economists, because it would threaten the Fed’s congressional mandate to focus on stable prices and maximum employment.

One of Trump’s complaints is that the Fed isn’t cutting rates even as other central banks around the world have reduced their borrowing costs, including in Europe, Canada, and the U.K. On Tuesday, the Bank of Japan kept its key short-term rate unchanged at 0.5%, after actually raising it recently.

But the European Central Bank, Bank of Canada, and Bank of England have reduced their rates this year in part because U.S. tariffs are weakening their economies. So far the U.S. economy is mostly solid, with the unemployment rate low.

The Bank of England has cut its rate twice this year but is expected to keep it unchanged at 4.25% when it meets Thursday.

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AP reporter Alex Veiga contributed.

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