The Fed’s Waiting Game: How Tariffs Put Interest Rate Changes on Ice

Imagine the Federal Reserve (ya’ know, “the Fed”) as the main bank for the whole country. One of its big jobs is to influence how expensive it is for people and businesses to borrow money. It does this using its key interest rate. Think of this rate like a volume knob for the economy – lower rates can encourage more borrowing and spending (turning the volume up), while higher rates tend to slow things down (turning the volume down).

What the Fed Decided:

On Wednesday (May 7, 2025), the Fed decided not to change its key interest rate. It’s keeping things steady for now, in a range that translates to roughly 4.3%. This is the third time in a row they’ve decided to hold steady, after lowering rates a few times late last year.

Why Didn’t They Change Rates? The Big Question Mark: Tariffs

The main reason the Fed is pausing is because of tariffs recently announced by President Trump. Tariffs are basically extra taxes put on goods that are imported from other countries. The Fed isn’t sure how these new tariffs will affect the U.S. economy.

Fed Chair Jerome Powell, the head of the Fed, put it plainly: “There’s just so much that we don’t know.” He explained that these tariffs could create a confusing situation:

1. Making Things More Expensive (Inflation): Tariffs can make imported goods (like electronics, clothes, or parts used to make things in the U.S.) cost more. If businesses have to pay more, they often pass those costs on to consumers, meaning prices go up. The Fed tries to keep inflation low and predictable.
2. Slowing Down the Economy & Costing Jobs (Unemployment): If tariffs make parts more expensive for businesses, or if other countries put tariffs on American goods in return, businesses might sell less, slow down production, or even lay off workers. The Fed also wants to keep unemployment low, meaning as many people as possible have jobs.

The Fed’s Tough Spot: Fear of “Stagflation”

Normally, rising prices (inflation) happen when the economy is strong and lots of people are buying things. Rising unemployment happens when the economy is weak.

The worry with these tariffs is that they could cause both problems at the same time: higher prices and more people losing jobs. There’s a word for this unusual and difficult situation: “stagflation.”

This is tough for the Fed because its usual tools work in opposite directions.

• To fight high prices, the Fed usually raises interest rates to slow down spending.
• To fight job losses, the Fed usually lowers interest rates to encourage spending and boost hiring.

If both problems happen at once, the Fed has a dilemma: which problem do you tackle when fixing one might make the other worse?

What’s Happening with the Economy Now?

Right now, the U.S. economy is mostly doing okay. Businesses are still hiring people, and unemployment is low. People are generally still spending money. However, Powell noted that the tariffs are making businesses and consumers nervous, and some are starting to hold off on big decisions. He also said that the ideal situation (called a “soft landing,” where inflation cools down without causing lots of job losses) seems less likely now if the tariffs stay in place.

So, What’s Next?

Because of all this uncertainty, the Fed is basically pressing pause. As Powell said, “We’re in a good position to wait and see.” They want to see how the tariffs actually affect prices and jobs before they make a move.

• If the economy slows down a lot and unemployment rises significantly, they might cut interest rates later this year.
• If inflation starts rising quickly because of the tariffs, they might keep rates where they are, or even consider raising them (though that seems less likely right now).

What About the President?

President Punk has been publicly asking the Fed to lower interest rates to boost the economy more. However, Chair Powell stated clearly that the Fed makes its decisions based only on the economic data and risks, not on politics. “(It) doesn’t affect doing our job at all,” Powell said about the President’s comments.

In a Nutshell:

The Fed is holding off on changing interest rates because President Punk’s new tariffs have thrown a big wrench into the economic picture. They’re worried the tariffs could lead to the nasty combination of rising prices and rising unemployment (“stagflation”). Since they don’t know exactly how things will play out, they’re waiting for more information before deciding whether to make borrowing cheaper (cut rates) or keep things as they are.