The Federal Reserve on Wednesday announced that it will leave its benchmark interest rate unchanged as policymakers continue to monitor inflation and the labor market amid elevated levels of economic uncertainty.

The central bank’s decision leaves the benchmark federal funds rate at a range of 4.25% to 4.5%.

It comes after the Fed left rates at that level at its two previous meetings in January and March, which followed three consecutive rate cuts at its preceding meetings — which involved a 50-basis-point cut in September and a pair of 25-basis-point reductions in November and December.

The Federal Open Market Committee (FOMC), which guides the central bank’s monetary policy moves, noted in its announcement that “[u]ncertainty around the economic outlook has increased further” and the Fed is monitoring risks to both sides of its dual mandate, adding that risks of higher unemployment and higher inflation have risen.

WITH THE ECONOMIC TUMULT, A SERIOUS CONCERN HAS EMERGED: STAGFLATION

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the FOMC wrote. “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”

Federal Reserve Chair Jerome Powell said in remarks following the announcement that the economy is in a “solid position” despite “heightened uncertainty” and noted that inflation has “come down a great deal, but has been somewhat above our 2% longer-run objective.”

“The new administration is in the process of implementing substantial policy changes in four distinct areas — trade, immigration, fiscal policy and regulation,” Powell said. “The tariff increases announced so far have been significantly larger than anticipated. All these policies are still evolving, however, and their effects on the economy remain highly uncertain. 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.”

“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. Avoiding that outcome will depend on the size of the tariff effects, on how long it takes for them to pass through fully into prices, and ultimately on keeping longer-term inflation expectations well-anchored,” he added, noting the Fed’s “obligation” is to help anchor those inflation expectations.

Imports surged in Q1 as companies looked to bring goods into the U.S. before higher tariffs took effect. (Joe Raedle/Getty Images / Getty Images)

Powell was asked by a reporter how the central bank would approach its dual mandate goals of maximum employment and stable price growth with inflation at 2% over the long run if it finds itself in a scenario where those goals are in tension. That could occur in a period of stagflation, with rising inflation and slow economic growth and a potentially weak labor market.

“This would be a complicated and challenging judgment we would have to make, and we’re not in this situation. But the situation is if the two goals are in tension — so let’s say that, hypothetically, but we would look at how far they are from the goals, how far they’re expected to be from the goals, what’s the expected time to get back to their goals, we’d look at all those things and make a difficult judgment,” Powell said. 

US JOB GROWTH COOLED IN APRIL AMID ECONOMIC UNCERTAINTY

The Fed chair was also asked about what his gut tells him about how the economy is evolving and replied, “My gut tells me that uncertainty about the economy is extremely elevated, and that the downside risks have increased.”

“The risk is, as we pointed out in our statement, the risks of higher unemployment and higher inflation have risen, but they haven’t materialized yet. They really haven’t, they’re not in the data yet. So that tells me, more than by intuition, I think it’s obvious, actually, that the right thing for us to do is — we’re in a good place, our policy is in a very good place, and the right thing to do is to await further clarity,” Powell said. “Usually things clarify, and the appropriate direction becomes clear.”

FOX Business’ Edward Lawrence asked Powell about the potential for interest rate cuts this year and whether that would be appropriate given the economic uncertainty and potential for higher inflation.

“It’s going to depend. I think you have to just take a step back and realize this is why we are where we are,” he replied. “We’re going to need to see how this evolves. There are cases in which it would be appropriate for us to cut rates this year. There are cases in which it wouldn’t, and we just don’t know. Until we know more about how this is going to settle out and what the economic implications are for employment and for inflation, I couldn’t confidently say that I know what the appropriate path will be.”

INFLATION GAUGE FAVORED BY FED SHOWED PRICE GROWTH SLOWED IN MARCH

The Fed holds its next meeting in mid-June. (Nathan Howard/Bloomberg / Getty Images)

Following the Fed’s announcement, the market sees a higher probability that the central bank will hold off on interest rate cuts at its next two meetings. The probability of rates staying at the current range of 4.25% to 4.5% in June rose from 69% to 75% compared with yesterday, while the likelihood of staying at that range in July rose from 22% to 30%, according to the CME FedWatch tool.

“The Fed still sees the economy on solid footing, but acknowledges upside risk to both sides of their mandate — unemployment and inflation — because of tariffs,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “With stagflation risks rising, the Fed’s communications will emphasize patience until there is enough clarity in the data.”

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Charlie Ripley, senior investment strategist for Allianz Investment Management, noted that the “committee toned down the concern over the negative GDP figure in Q1 given the impact from net exports, which tells us that despite volatile markets, the current state of the U.S. economy shows expanded activity at a solid pace.”

“Patience is a virtue and the Fed seemingly has an abundance of it relative to other market participants, so until we see some further signs of a weakening economy, the Fed will remain on the sidelines,” Ripley added.

The FOMC is scheduled to hold its next policy meeting on June 17-18.