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The Federal Reserve on Wednesday left its benchmark interest rate unchanged at 4.25% to 4.5%, signaling deepening concern over a stagflationary environment—a troubling mix of slowing growth and rising prices—exacerbated by tariffs imposed during the Trump administration.
The Fed’s latest projections paint a pessimistic picture of the months ahead. Policymakers raised their inflation forecast for 2025 to 3%, up from 2.7%, and cut the economic growth outlook from 1.7% to 1.4%. Unemployment is now projected to edge up to 4.5%.
Despite these signs of weakness, the central bank held to its plan of two rate cuts later in the year, offering little relief to markets or consumers facing rising prices and tighter credit conditions.
Tariffs and the Stagflation Threat
The Fed’s outlook reflects growing concerns that import duties on foreign goods—a centerpiece of President Donald Trump’s trade policy—are contributing to upward pressure on prices, while dampening economic growth.
“We still expect to see some abnormally large increases in goods prices by later in the summer,” said analysts at Citi in a research note, citing expected tariff-driven price increases in categories like automobiles.
However, they warned that soft consumer demand may mute those effects. With weak spending on services like hotels and airfares, businesses may struggle to pass on higher import costs, potentially dampening inflation—but also hurting profits and hiring.
Labor Market: Stable But Cracking?
Fed Chair Jerome Powell noted that labor market conditions remain “solid,” but economists are beginning to question the depth of that strength. Jobless claims have climbed to nearly 2 million, the highest level since late 2021, and hiring has slowed to levels not seen in over a decade.
“The labor market looks fine on the surface, but the trajectory is concerning,” said Preston Mui, a senior economist at Employ America. “There are a lot of stories you can tell about why the labor market will crack.”
Mui pointed to declining labor force participation and slipping employment as warning signs that the Fed’s restrictive policy may be causing more damage than intended.
Trump and the Politics of Inflation
President Donald Trump has repeatedly called for immediate rate cuts, dismissing inflation concerns altogether.
“There is no inflation,” Trump has said, citing weaker-than-expected retail spending and signs of cooling price pressures in recent months. Some economists agree it’s unclear how significant the tariff effects will be, given advanced consumer purchases ahead of implementation and uncertainties around global supply chains.
Still, others argue the risks are real.
“The economy is going to get uncomfortable for the remainder of the year,” said Mark Zandi, chief economist at Moody’s Analytics. “Inflation may rise, growth will slow, and we remain vulnerable to external shocks like conflict in the Middle East.”
Fed Stuck Between Two Fires
The Fed is now caught between its dual mandate: keeping both inflation and unemployment low. But achieving both simultaneously may be impossible in the current economic climate.
Rising prices—fueled partly by tariffs—and weak hiring have put the central bank in a bind. Cutting rates too early risks reigniting inflation. Waiting too long, however, could deepen a slowdown and worsen job losses.
Market bets now suggest no rate cut at the Fed’s June or July meetings, with Wall Street largely aligned on a “wait-and-see” posture until more inflation data emerges.
As the 2024 election looms and the economy teeters, pressure on the Fed—and the risks of policy missteps—will only grow.
