The Federal Reserve is widely anticipated to maintain its benchmark interest rate on Wednesday, continuing a 'wait-and-see' approach as it assesses the complex impact of President Donald Trump's tariff policies on the U.S. economy. This posture of restraint has been met with sharp and repeated criticism from President Trump, who advocates for significant interest rate cuts to stimulate economic growth. Despite this political pressure, the Fed, operating as an independent federal agency, is expected to hold its ground, with market sentiment, as measured by the CME FedWatch Tool, indicating a 99.9% probability of rates remaining unchanged.

The central bank's decision is guided by its dual mandate: to control inflation and maximize employment. While inflation has generally remained near its lowest levels since 2021 and job growth, though slowed, remains sturdy, recent data showed a slight acceleration of price increases. Fed Chair Jerome Powell has expressed concerns that tariffs could lead to 'stagflation'—a scenario where inflation rises while the economy slows—which would put the central bank in a precarious position. Raising rates to combat tariff-induced inflation could stifle borrowing and further slow the economy, while lowering rates to stimulate the economy could worsen inflation.

President Trump has vocally attacked Chair Powell, calling him a 'numbskull' and 'stupid' for his perceived unwillingness to cut rates. Trump argues that lower borrowing costs would not only boost the economy but also save the federal government 'hundreds of billions' on its $36 trillion debt. He has contrasted the Fed's inaction with rate cuts seen in Europe, and has even mused about appointing himself as Fed chair. Despite a recent meeting between Trump and Powell, the Fed has consistently reaffirmed its independence, vowing not to be swayed by political pressure from the administration, including Vice President JD Vance.

The initial concerns about tariffs weighing heavily on the U.S. growth outlook have somewhat softened. President Trump has recently dialed back some of his steepest tariffs and a trade agreement between the U.S. and China has led to a reduction in tit-for-tat tariffs. This has prompted Wall Street firms to soften their forecasts of a downturn. However, an across-the-board 10% tariff generally applies to nearly all imports, with exceptions for items like semiconductors and pharmaceuticals, and some tariffs remain in place for steel, aluminum, and certain goods from Canada and Mexico.

Economic projections from the Fed's Summary of Economic Projections (SEP) will offer critical insights into future growth, inflation, and unemployment. While officials may still pencil in two rate cuts for the year, some economists suggest the 'dot plot' could indicate just one. Concerns persist about future inflation, with nationwide retailers like Walmart and Best Buy voicing alarm about potential price hikes due to levies. The Organization for Economic Co-operation and Development (OECD) expects U.S. inflation to reach 4% by the end of 2025, a significant increase from current levels.

Other factors influencing the economic outlook include the bond market and the workforce. Government borrowing costs, set by the bond market, have risen, making mortgages, car loans, and other consumer borrowing more expensive. Additionally, the foreign-born workforce has shrunk by over a million people in recent months, which Fed Governor Adriana Kugler warned could 'add meaningful upward pressure to inflation' in sectors reliant on immigrant labor, such as agriculture, construction, food processing, and leisure and hospitality. Despite cooling demand for workers, the unemployment rate remains low at 4.2%.

The Fed's benchmark interest rate is expected to remain in a range between 4.25% and 4.5%. Chair Powell's press conference following the decision will be closely watched for any updates to the forecast and insights into the Fed's strategy amidst ongoing economic uncertainty and political demands. He is likely to emphasize the risk of price pickups, particularly if higher tariffs take effect as scheduled. The discussion around the Fed's authority to pay interest on reserves held at the central bank (IORB), a tool crucial for controlling short-term interest rates, also remains a point of interest, especially with Senator Ted Cruz proposing its elimination.