US Federal Reserve keeps interest rates steady amid Trump's tariff chaos

The US Federal Reserve has kept the country's interest rates unchanged as central bank officials weigh the impact of President Donald Trump's aggressive economic agenda.

The decision on Wednesday (Thursday AEDT), which comes at the conclusion of the Fed's two-day monetary policy meeting, shows that central bankers are waiting for evidence that inflation is headed toward their 2 per cent target — or that the economy is weakening more than expected. Those are the two outcomes that would put rate cuts back on the table.

Officials still expect to trim borrowing costs twice this year, according to their latest economic projections released on Wednesday, though eight officials are predicting one or no cuts this year, compared with only four who expected that in December.

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Fed Chair Jerome Powell in his post-meeting news conference acknowledged the high level of uncertainty among American consumers and businesses — a lot of it stemming from the Trump administration's "turmoil," he said. Powell said that "it remains seen how these developments affect future spending and investment."

The Fed's key borrowing rate remains in the 4.25 per cent to 4.5 per cent range. Keeping them on hold also allows policymakers to see how the Trump administration's flurry of policy changes ultimately affects the US economy, he said . That includes hefty tariffs, mass deportations and a downsizing of the federal workforce.

In recent speeches, officials have said they're willing to adjust interest rates in either direction, depending on what economic figures show.

The Fed's latest pause marks the second time in a row that the central bank held borrowing costs steady.

Fed policymakers also expect the economy to be weaker this year than previously thought, according to the projections. They also forecast inflation to be higher this year.

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To put it simply, as the Trump administration sets out to enact structural changes, Fed officials see the US economy trending toward "stagflation," a troubling combination of sluggish or negative growth and accelerating inflation. It remains to be seen whether the US economy ultimately slips into a period of outright stagflation, which last occurred in the 1970s.

All 12 Fed officials with voting power voted in favour of Wednesday's decision to hold interest rates steady, though Fed Governor Christopher Waller dissented to a decision to slow the pace of the central bank's offloading of securities on its balance sheet.

Here are key takeaways from the Fed's latest decision as Trump proceeds with significant policy changes.

Powell on Trump's policies and where the economy stands

Trump's policies remain a huge wild card for the Fed because of their potentially wide-ranging effects on the economy. As expected, Powell was peppered with questions from reporters on how the Fed is assessing Trump's policy changes and he said it's still an evolving situation with many unknowns.

Trump's tariffs threaten higher inflation and weaker growth, his administration's aggressive crackdown on immigration can cause labour shortages in certain industries, his mass layoffs of federal workers could send some local economies into a recession, but his deregulation efforts and the extension of his 2017 tax cuts could promote growth. Put together, it's unclear what the "net effect" of Trump's policies on the US economy will be, as measured by growth, inflation and the labour market.

Powell said Trump's tariffs was a factor contributing to officials's higher inflation forecasts for this year, but he noted that it's difficult to gauge how much of the higher inflation expected this year will be due to Trump's trade war.

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Earlier this month, Powell said officials will be guided by what economic statistics ultimately show, not what forecasts predict. The Fed leader said that data shows there's been a "a moderation in consumer spending."

While American shoppers might finally be pulling back some, the US labour market remains a sturdy pillar of strength for the economy. In February, unemployment stood at a low 4.1 per cent as employers added a healthy 151,000 jobs. And new applications for unemployment benefits, often an early indicator of any shifts in the labour market, remain historically low.

Indeed, Powell pointed to the jobs market's resilience as a key bright spot in the US economy, adding that any unexpected weakening could force central bankers to resume cutting sooner.

"Labour market conditions are solid," Powell said.

When asked to weigh in on the odds of a recession, which some economists say have grown in recent weeks, Powell said those chances haven't risen to concerning levels yet.

"Forecasters have generally raised — a number of them have raised their possibility of a recession somewhat. But still at relatively moderate levels," he said. "If you go back two months, people were saying that the likelihood of a recession was extremely low. So it has moved, but it's not high."

Powell on America's souring mood and its implications

The so-called "hard data" that captures actual economic activity remains solid, but Trump's agenda has already shown up clearly across various sentiment surveys, or "soft data," Powell said.

On America's souring economic mood, Powell said it's not clear how that will affect spending, which powers 70 per cent of the US economy.

"The relationship between the survey data and economic activity hasn't been very tight," he said. "There are times people are saying very downbeat things about the economy and then going out and buying a new car."

But not only are American businesses and consumers growing pessimistic about the economy, but they're also expecting inflation to ratchet higher and remain elevated in the coming years, according to the University of Michigan's latest consumer survey.

If long-term inflation expectations continue to climb, that could force the Fed to consider raising interest rates. In 2018 during Trump's first trade war, rising inflation expectations was a key factor that Fed officials pointed to that would force them consider hiking interest rates, according to a declassified document detailing policy alternatives, known as the "teal book."