The US Interest Rate Outlook Is Increasingly Uncertain

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Those are big ifs, however. The Fed says risks are rising that inflation and unemployment will both worsen during the next several months. If that happens, it could force the Fed to choose between fighting inflation by raising rates or fighting unemployment by lowering them.

“The new administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation,” Powell said .“The tariff increases announced so far have been significantly larger than anticipated. All of these policies are still evolving, however, and their effects on the economy remain highly uncertain.”

Powell's Fed is under attack by President Donald Trump, who wanted rate cuts on Wednesday and who calls Powell“Mr. Too Late.” Yet, despite the president's on-and-off threats to can Powell – which he may not have the legal power to do – don't assume the Fed will bow to the pressure.

A central bank that appeared to be bowing to political pressure against its better economic judgment would not just be undermining its own independent status. It would risk financial markets panicking.

Trump wants the Fed to cut preemptively, before the economy turns down. But because the Fed doesn't know whether inflation or unemployment will be the bigger problem in the months ahead, it isn't sure cutting will make sense. In its economic judgment, waiting, not acting, makes the most sense.

Not only does the Fed have to worry about inflation; it has to worry about inflationary expectations. History suggests that if consumers and businesses believe prices are going to rise, they'll rise; adjustments to expected inflation cause inflation.

Those expectations are“well anchored” now – Americans aren't anticipating big future price increases. But that could change quickly if prices start to go up sharply. Memories of supercharged inflation in 2021 and 2022 linger. Expectations could become unanchored easily.

The Fed, then, won't have the liberty of assuming that tariff-driven price increases are one-time,“transitory” increases, as it mistakenly deemed the supply-chain price increases the country saw during the Covid epidemic. Powell knows he really was“too late” raising rates then.

“Our obligation,” Powell said,“is to keep longer-term inflation expectations well anchored and to prevent a one-time increase in the price level from becoming an ongoing inflation problem.”