Fed holds rates because of tariff 'uncertainty'

The US central bank has warned that President Donald Trump's tariffs have created "so much uncertainty" that it is unsure what to do about interest rates.

The Federal Reserve announced on Wednesday it would keep interest rates unchanged, despite pressure from Trump to lower borrowing costs.

But Fed chairman Jerome Powell said the economic fallout from Trump's tariffs meant it was "not at all clear" what the bank should do next.

The decision marked the third in a row without action, leaving the bank's key lending rate hovering around 4.3%.

Powell said if Trump's tariff policies remain in place they were likely "to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment".

Typically, the Fed cuts rates if it believes the economy is struggling and raises them if prices start to rise too quickly.

But the bank - which is set up to make policy independent of the White House -said tariffs had raised the risk of both an economic slowdown and faster price rises, complicating its next move.

"It's really not at all clear what it is we should do," Federal Reserve chairman Jerome Powell said on Wednesday. "There's so much uncertainty."

Wednesday's decision is the Fed's first since Trump's tariff announcements last month raised import taxes on goods from countries around the world, with imports from China facing duties of at least 145%.

Logistics firms and ports in the US have since reported sharp drops in trade, while analysts have warned that the risk of recession has ramped up significantly since the start of the year.

Trump, who promised lower rates while campaigning for re-election last year, has called on the Fed to lower rates "pre-emptively" and flirted with firing the head of the bank, criticising him as "a major loser" and "Mr Too Late" for not cutting rates fast enough.

The European Central Bank cut interest rates last month, citing concerns about the economy due to the trade tensions. The Bank of England is widely expected to take a similar step this week.

US-China trade

Officials from the US and China are set to meet this week, but the scope of the talks remains unclear. Trump on Wednesday dismissed the idea of lowering tariff rates pre-emptively to help trade negotiations.

Powell said the talks had the potential to change the economic picture "materially".

"Usually, things clarify and the appropriate direction becomes clear," he said. "Right now it's very hard to say what that would be. In the meantime, the economy is doing fine."

The US economy shrank in the first three months of the year for the first time since 2022. But officials said those figures had been distorted by firms rushing goods into the country ahead of tariffs rather than a decline in wider activity.

Hiring remained unexpectedly strong last month, keeping the unemployment rate near historic lows of 4.2% while the US stock market has largely recovered from the sharp declines it saw last month.

Powell said those figures gave the Fed time to wait.

"We can move quickly when that's appropriate but we think right now the appropriate thing to do is wait and see how things evolve," he said.