(WASHINGTON) — Federal Reserve Chair Jerome Powell stepped to the podium in August with a sunny forecast that defied the snow-capped mountains inscribed on curtains behind him.
The central bank planned to begin cutting rates, Powell announced, reversing a yearslong battle against pandemic-era inflation. “The time has come,” Powell told the audience at a conference in Jackson Hole, Wyoming, touting a steady cooldown of price increases.
Months later, economic uncertainty looms large, complicating the Fed’s approach while clouding the outlook for inflation and interest rates, some experts told ABC News.
President Donald Trump’s tariffs have roiled markets, stoked recession concerns and heightened worries about inflation. In short order, Trump has paused or reversed some tariffs, casting doubt over his plans and adding to the uncertainty, the experts added.
Policymakers, business leaders and everyday borrowers will turn their attention to the Fed on Wednesday for its latest interest rate decision, the first such move since days after Trump took office.
“The Fed is in a tough position,” Wendy Edelberg, director of the Hamilton Project and senior fellow in economic studies at the left-leaning Brookings Institution, told ABC News.
“We have all of the potential negative effects of tariffs, but we also have extraordinary uncertainty,” Edelberg added.
The Trump administration earlier this month slapped 25% tariffs on goods from Mexico and Canada, though the White House soon imposed a one-month delay for some tariffs. A fresh round of duties on Chinese goods doubled an initial set of tariffs placed on China a month prior.
Tariffs imposed on steel and aluminum last week triggered retaliatory tariffs from Canada and the European Union, adding to countermeasures already initiated by China.
By some key measures, the economy remains in solid shape. A recent jobs report showed solid hiring last month and a historically low unemployment rate. Inflation stands well below a peak attained in 2022, though price increases register nearly a percentage point higher than the Fed’s goal of 2%.
However, experts said, tariffs may threaten both parts of the Fed’s mission: controlling inflation and maximizing employment.
Economists widely expect tariffs to increase inflation, since exporters typically pass along a share of the tax to consumers in the form of price hikes.
Consumers expect the inflation rate to rise from 2.8% to 4.9% over the next year, according to University of Michigan survey results released last week. The measure marked a significant jump in year-ahead inflation expectations compared to findings in February.
“There will be a price impact,” Yeva Nersisyan, a professor of economics at Franklin & Marshall College, told ABC News.
Tariffs could also threaten economic growth and employment since duties slapped on imports risk increasing input costs for domestic businesses that rely on raw materials from abroad, some experts told ABC News. Retaliatory tariffs may crimp exporting businesses since the taxes make U.S.-made products less competitive in foreign markets, they added.
Goldman Sachs earlier this month hiked its odds of a recession over the next year from 15% to 20%. Moody’s Analytics pegged the chances of a recession at 35%.
“There’s a risk that the economy does roll over and fall into a recession,” William English, a professor of finance and former economist at the Federal Reserve, told ABC News.
“The Fed probably sees an upside risk to inflation and a downside risk to employment,” English added. “They’ll have to balance those as they consider the path of policy.”
For its part, the Trump administration has largely declined to rule out the possibility of a recession. Speaking at the White House last week, Trump said a “little disturbance” may prove necessary to rejuvenate domestic production and reestablish well-paying manufacturing jobs.
The thorny economic outlook presents potential difficulty for the Fed, experts said.
If the central raises rates as a means of protecting against possible tariff-induced inflation, the Fed risks stifling borrowing and slowing the economy. On the other hand, if the Fed lowers rates to stimulate the economy in the face of a potential recession, it threatens to boost spending and drive up inflation.
“If we were in an environment where inflation were to rise and rise consistently at the same time growth is slowing and unemployment is rising, that’s a real challenge for the Fed,” Claudia Sahm, chief economist at New Century Advisors and a former Fed official, told ABC News.
For now, the main quandary before the Fed stems from the wide range of possible outcomes, the experts said. Uncertainty, they said, will likely prompt the central bank to await further clarity.
Investors overwhelmingly expect the central bank to leave rates unchanged on Wednesday, according to the CME FedWatch Tool, a measure of market sentiment.
“For now, the Fed probably sees waiting as the best approach,” Nersisyan said.
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