Federal Reserve warns of impact of Trump tariffs as US interest rates held

The US central bank held interest rates as it said Trump tariffs have risked higher inflation and unemployment amid "so much" uncertainty.

The announcement is likely to anger President Donald Trump, who has made the taxes on imports one of his signature policies and had threatened to fire the Federal Reserve chair, Jerome Powell.

On Wednesday, the Federal Reserve, known as the Fed, held rates at 4.25%-4.5%. Unlike the UK, the US interest rate is a range to guide lenders rather than a single percentage.

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It means borrowing costs have remained unchanged for Americans, something Mr Trump had wanted to reduce.

Interest rates have been raised by the Fed to bring down high inflation in the wake of Russia's invasion of Ukraine and the supply chain crisis brought about by COVID-19 lockdowns.

Fears of inflation rising higher as tariffs make goods on US shelves costlier, and of job losses from reduced spending, led the Fed to remain cautious.

The full effect of the tariffs is "highly uncertain", Mr Powell said on Wednesday evening, as those announced so far have been "significantly larger" than anticipated.

A 90-day pause was announced on the suite of taxes Mr Trump imposed on countries across the world, on top of the 10% base tariff, which has remained in place.

A trade war was kicked off between China as the countries escalated tariffs on each other to nearly 150%. Taxes on cars and some metals entering the US are still subject to a 25% tax.

If these tariffs remain, Mr Powell made the strongest statement yet that goods overall would become more expensive.

"If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment," he said.

"The effects on inflation could be short-lived, reflecting a one-time shift in the price level. It is also possible that the inflationary effects could instead be more persistent," he added.

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Uncertainty over the economic outlook also caused consumer and business sentiment to fall, "largely reflecting trade policy concerns", Mr Powell said.

Despite Mr Trump appointing Mr Powell to the Fed chair position during his first term, the president has repeatedly spoken out against Mr Powell.

Markets rallied after Mr Trump ruled out ousting Mr Powell at the end of April.

It comes as the UK central bank, the Bank of England, is poised to cut interest rates on Thursday afternoon. The base rate is anticipated to drop to 4.25% before falling to 3.5% by the end of the year.

(c) Sky News 2025: Federal Reserve warns of impact of Trump tariffs as US interest rates held