The Federal Reserve said Wednesday it will hold interest rates steady as the US economy begins to show the effects of President Donald Trump’s haphazard trade war.

The central bank kept its benchmark lending rate unchanged at a range of 4.25% to 4.5%, extending a holding pattern that began in January.

Officials have said it’s best to wait on the sidelines for data to show how the US economy is responding to Trump’s significant policy changes, though the Fed said in its latest policy statement that the “risks of higher unemployment and higher inflation have risen” — a toxic duo known as stagflation.

Fed Chair Jerome Powell in a news conference said that uncertainty is pervasive, from where policy is headed to how the economy will evolve in the face of Trump’s ongoing trade spat with the world. He also reiterated the growing threat of stagflation, but said America’s labor market remains a reassuring bright spot in the economy.

Trump’s whipsawing tariffs have already taken a toll on economic growth, which Powell attributed to a surge in imports. The US economy contracted in the beginning of the year, its first quarterly decline since 2022, as Americans rushed to beat Trump’s tariffs, which sent imports surging. A higher trade deficit, a result of imports exceeding exports, subtracts from GDP.

Still, the US economy hasn’t fallen off a cliff just yet. In April, employers added a robust 177,000 jobs as the unemployment rate held steady at a low 4.2%, and even in the latest GDP report, a key gauge of underlying demand in the economy actually strengthened in the first quarter. Indeed, Powell sang the labor market’s praises.

That strength is allowing the Fed to remain on hold, since the economy doesn’t seem to need any support through rate cuts at the moment. Fed officials said in their statement that “economic activity has continued to expand at a solid pace,” in spite of the effects of surging imports on GDP.

But some economists doubt that economic resilience will persist indefinitely, with businesses struggling with the uncertainty sowed by Trump’s policies, according to various sentiment surveys. That lingering uncertainty could affect hiring plans, prompt consumers to pull back and eventually hamper business investment. Then of course, there’s also the direct effects of tariffs in pushing up prices, which would weigh on consumers who’ve already dealt with years of high inflation.

Overall, the economy isn’t currently sending a clear signal to the Fed on how it should proceed with borrowing costs. That’s precisely why Fed officials are standing pat at this meeting, but the most economists, in addition to the Fed now, agree there’s a real risk of stagflation.

Powell refused to directly answer questions related to Trump or his recent attacks.

Powell on the twin threat of stagflation
Stagflation bedeviled the Fed in the 1970s and early 1980s, and it may make a comeback because of Trump’s tariffs.

Powell again nodded to that possibility when taking questions from reporters, but how Fed officials ultimately react to the fallout of Trump’s tariffs will depend on a lot of factors and nuances, including whether or not any spike in inflation is temporary.

He laid out a simple playbook for how the Fed should address stagflation, should it occur outright: “We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close.”