The Federal Reserve’s dilemma on how to handle interest rates is getting more challenging with tariffs yet to have a significant effect on inflation along with signs of slowing spending that powers the U.S. economy, create a difficult balancing act for the central bank.

The Fed has made caution a priority over the last two years before it has moved to make any cuts to its benchmark interest rate that has been frozen at a range of 4.25% to 4.5% since December. But officials have also positioned themselves as wanting to maintain both ends of its dual mandate of stable prices and maximum employment as the labor market has shown some cracks.

President Donald Trump’s tariffs create a challenge for the Fed in both pursuits. Most pressing, they raise prices as businesses pay more for parts and goods and pass those costs onto consumers. Higher prices eat at consumer confidence and demand that can weaken the economy, threaten the labor market and risk a recession.

Economists are broadly expecting the Fed to stand pat on rates at its upcoming meeting, but how the central bank proceeds beyond that is less clear.

Tariff-induced inflation has been slow to materialize, with around two months of data captured in the consumer price index. May’s reading showed prices rose a modest 0.1% from April and were 2.4% on an annual basis. There is lag time from price pressures in tariffs showing up in inflation data, but there are still questions about when the widely predicted price increases will show up and how stiff those costs will be.

What level tariffs on all of America’s biggest trading partners will be is also entirely undecided, with little settled on trade negotiations and Trump’s history of going back and forth on new import taxes.

“The reality is that we still have lots of uncertainty around the tariffs. Will negotiations be successful? Will they fail? Will we have hikes again?” said Mark Williams, a finance lecturer at Boston University’s Questrom School of Business and former bank examiner at the Fed. “If we were to say these were the numbers that for work for June and the tariff negotiations are actually buttoned up that would give a little more ability for the Fed then to go ahead and cut rates.”

The labor market, while still solid, is starting to show cracks that can weaken consumer spending that makes up some 70% of U.S. economic activity.

Hiring has remained steady through a wide range of obstacles, most recently tariff-induced economic uncertainty, with employers adding jobs and a stable unemployment rate that sat at 4.2% as of last month. But hiring has not been widespread across industries, and the government has revised previous data downward.

Payroll processor ADP reported a slowdown in private sector hiring with just 37,000 jobs in May. The report prompted Trump to again call for the Fed to lower interest rates.

Consumer demand is also not as robust as it was when inflation surged to 9% in 2022. Government data from April showed spending slowed sharply with less spending on nonessential and tariff-sensitive items like cars, clothing and durable goods. Americans also started to save more in a signal of greater caution and sensitivity to prices.

Consumers and businesses also tried to get ahead of Trump’s tariffs at the beginning of the year. Companies stocked up on products before they took effect in hopes of delaying cost increases or having enough supply to outlast the tariff increases with trade deals to come. But multiple executives at major retailers like Walmart, Mattel and Best Buy have also warned that price increases are likely because of tariffs.

“Many retailers themselves are absorbing the short-term costs of tariffs because they don’t want to lose business, so they’re hurting their margins, but long-term, they’re not going to continue to do that,” Williams said.

Trump has been pressuring the Fed and Chair Jerome Powell to cut rates for months to give the economy a boost as it has hit some roadblocks as a result of his tariffs. During an event at the White House on Thursday, the president called Powell a “numbskull.”

“We can’t get this guy to do it,” Trump said of Powell. “And the fake news is saying ‘Oh, if you fired him, it would be so bad.’ I don’t know why it would be so bad, but I’m not going to fire him.”

Trump said he might have to “force something” when it comes to the Fed, though it was unclear what he meant by that. He has made references to removing Powell from his post in the past but also said during Thursday’s remarks that he was not going to do that.

“What is he doing? Why doesn’t he lower these rates?” he said.

Powell met with Trump at the White House last month to discuss the economy, where the Fed said in a readout of the meeting that Powell did not discuss his expectations for monetary policy except that its path will depend on data and what it means for the overall economic outlook.

Have a news tip? Contact Austin Denean at atdenean@sbgtv.com or at x.com/austindenean.