By Bryan Mena, CNN
Washington (CNN) — President Donald Trump’s sweeping economic agenda is putting the Federal Reserve in a difficult situation it hasn’t confronted in decades. The topic is front and center for central bank officials as they convene for their two-day policy meeting this week.
Trump has plunged the United States into an erratic trade war that threatens higher inflation and rising unemployment. The Fed may now have to choose between saving jobs or fighting inflation. If it lowers rates to guard against an economic downturn from Trump’s tariffs, that could potentially push up inflation. Yet if it raises rates to discourage a potential surge in inflation from Trump’s trade agenda, that could trigger an increase in joblessness.
However, the most likely scenario is that the Fed will announce Wednesday that it is holding its benchmark lending rate steady at a range of 4.25% to 4.5%, extending a pause that began in January.
“The Fed is caught in this wait-and-see approach, and the next round of data should swing them one way or the other, whether it’s to cut rates and support the economy or stay on hold to guard against additional inflation,” Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth, told CNN.
“Once we get to early June, the economic data should give much greater insight on the impact of tariffs,” he said.
For his part, Trump has accused the Fed of being behind the curve, ratcheting up pressure on the central bank in recent weeks to lower borrowing costs and attacking Chair Jerome Powell.
Stagflation, the two-headed beast
Trump’s tariffs could lead to “stagflation,” a toxic combination of stagnant growth and rising inflation that plagued the Fed in the 1970s and early 1980s.
Economists — and Powell himself — have nodded to that possibility in recent remarks, with the Fed chair saying in an April 16 speech that “we may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”
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.
“I’m willing to look through whatever tariff price effects there are,” Fed Governor Christopher Waller told Bloomberg last month. “I’m not going to overreact to any increase in inflation that I think is attributable to the tariffs.”
However, if unemployment drops considerably, Waller said that it “is important that we step in.”
So far, America’s job market remains in good shape: In April, employers added a stronger-than-expected 177,000 jobs and the unemployment rate held steady at a low 4.2%. But some economists doubt that resilience will persist, with employers feeling paralyzed by Trump’s confusing on-again off-again tariff blitz.
Trump’s trade war has already weighed on economic growth: Gross domestic product, which captures all the goods and services produced in the economy, contracted at an annualized rate of 0.3% in the beginning of the year on a surge in imports as Americans rushed to beat Trump’s tariffs, the first quarterly decline since 2022.
Still, Fed officials have said in recent speeches they require additional economic data to guide their upcoming decisions in the face of swirling uncertainty.
“To me, this is a good moment for us to take our time and make sure we’re moving in the right direction,” Cleveland Fed President Beth Hammack told CNBC in an April 24 interview.
“You’ve seen that this is not a Fed that’s afraid of moving quickly if we need to move quickly,” she said. In 2022, when inflation was running at 40-year highs, the Fed was hiking aggressively by as much as three-quarters of a point at some meetings.
Trump has said he wants Powell out
As the Fed faces what could become a complicated economic puzzle, the central bank’s longstanding independence has also come under threat.
Trump is a vocal critic of the Fed, usually slamming the central bank for not lowering borrowing costs whenever he sees fit. His criticism of the Fed goes as far back as his first term and it’s also usually coupled with jabs at Powell.
On several occasions over the past several weeks, Trump has torn into Powell, calling him a “major loser” and accusing him of not lowering borrowing costs for political reasons. At an Oval Office event on April 17, Trump said “if I want him out, he’ll be out of there real fast, believe me.”
But after that public tirade against Powell, top administration officials warned Trump of the chaos that could unfold in financial markets if he proceeds with sacking the Fed chief. Since then, Trump has softened his tone on Powell, saying he won’t try to fire him. In an NBC interview that aired Sunday, he reiterated that stance, adding that he’ll “get to change him very quickly anyway.” Powell’s term ends in May 2026.
Powell has said the law does not give Trump the authority to remove any Fed official, including himself, without pointing to a justifiable cause.
He is scheduled to take questions from reporters at a news conference at 2:30 p.m. ET.
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