WASHINGTON– The Federal Reserve held interest rates steady Wednesday and kept its forecast for two cuts in 2025 as officials struggled to respond to the double-barreled threats spawned by President Donald Trump’s widening trade war – rising inflation and a slowing economy.

Although Trump recently slapped tariffs on many imports and unveiled plans for more aggressive duties in two weeks, the Fed’s decision underscores that it’s taking a wait-and-see approach as it assesses the scope, duration and impact of the fees.

The Fed also raised its 2025 inflation forecast while downgrading its economic growth outlook.

“Uncertainty around the economic outlook has increased,” the Fed said in a statement after a two-day meeting. The central bank also removed its prior assertion that “risks to achieving its employment and inflation goals are roughly in balance.”

The moves leave the Fed’s benchmark short-term rate unchanged at a range of 4.25% to 4.5% for a second straight meeting after officials chopped it by a total percentage point from September through December following a substantial drop-off in price increases.

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That means Americans will continue to benefit from cheaper borrowing costs for credit cards, some mortgages and auto and other loans compared to a year ago while also seeing lower bank savings yields. But there won’t be a further rate decrease in the near term.

With inflation remaining elevated in recent months, officials have paused their rate-cutting campaign so far this year. The hiatus was expected to be brief but Trump’s tariffs have come sooner and at a larger scale than expected, forcing policymakers to reassess their interest rate outlook.

Also generating uncertainty about the economy’s prospects are the President’s federal layoffs and deportations of millions of immigrants who lack permanent legal status.

Yet the trade battles in particular present the Fed with an unusual quandary.

The Fed reduces interest rates to make loans cheaper and bolster a slumping economy. It raises rates, or keeps them higher for longer, to tame inflation by increasing borrowing costs and cooling the economy.

The tariffs, however, are likely to both push up inflation as manufacturers and retailers pass much of the added cost to consumers, and dampen growth by sapping Americans’ buying power. That would leave the Fed torn between its dual mandates and grappling with a rare one-two punch known as stagflation.

For now, the central bank appears to be withholding judgment on which hazard is more formidable, leaving its December rate forecast for 2025 unchanged.

Fed officials project they’ll lower the federal funds rate by half a percentage point this year to a range of 3.75% to 4%, according to their median estimate. But the divide among policymakers is growing, with nine looking for two rate decreases, two preferring three cuts and eight penciling in one or none.

Officials foresee another two cuts in 2026, bringing the rate to about 3.4%, in line with their previous forecast.

What is the expected inflation rate in 2025?

Officials now figure their preferred measure of annual inflation will rise from 2.5% to 2.7% by year-end, above the 2.5% they predicted in December, according to their median estimate.

A core inflation reading that excludes volatile food and energy items and that the Fed follows more closely is expected to rise from 2.6% to 2.8%, above the previous 2.5% estimate.

Is the economy expected to get better in 2025?

The Fed said it expects the economy to grow 1.7% this year, below its prior 2.1% estimate.

The 4.1% unemployment rate is projected to rise to 4.4% by the end of the year, above the December forecast of 4.3%, the Fed’s median estimate shows.

What is the status of Trump’s tariffs?

Trump already has imposed a 25% tariff on imported steel and aluminum, 20% on all shipments from China and 25% on some goods from Canada and Mexico.

Levies scheduled to take effect next month include 25% on the remaining imports from Canada and Mexico; 25% on autos, pharmaceuticals and computer chips; and sweeping reciprocal tariffs that would match whatever other countries charge the U.S.

Goldman Sachs expects the charges to drive up inflation by half a percentage point and reduce growth by a similar amount. Other economists expect a bigger toll of as much as a percentage point on both inflation and growth. JPMorgan Chase has raised its recession odds to 40%.

The Fed’s preferred measure of overall inflation declined swiftly last year following a pandemic-related spike but has been stuck at 2.5% since fall, above its 2% goal. The core reading slid to 2.6% in January but Barclays reckons it rebounded to 2.8% in February, leaving it too unchanged in recent months.

At the same time, the economy has started to wobble. Retail sales fell sharply in January and rebounded just modestly last month, a worrisome sign for consumption, which makes up 70% of economic activity. Consumer confidence has tumbled because of the trade conflicts and Trump’s federal layoff plans.

The S&P 500 index is down about 8% from its record high in mid-February, wiping out wealth for higher-income Americans who have driven spending gains.

And while U.S. employers added a fairly solid 151,000 jobs last month, underemployment jumped to the highest level in more than three years as businesses shaved employees’ hours.

The Federal Reserve Bank of Atlanta estimates the economy will contract at an annual rate of 1.8% in the current quarter.

Although Goldman Sachs and Barclays believe the Fed will look to keep interest rates high for now, they say the risks to the economy from large tariffs could eventually force officials to cut rates more than anticipated.

What did the Fed decide on its balance sheet?

The Fed also made a technical move related to its financial portfolio. It has been shrinking its holdings of Treasury bonds and mortgage-backed securities, reversing the stimulus it provided during the pandemic and putting slight upward pressure on long-term interest rates.

But reducing the balance sheet too rapidly could disrupt financial markets while Congress and the White House debate whether to raise the debt ceiling. That process also could affect the Treasury Department’s holdings at the Fed as the government seeks to preserve cash.

So the Fed agreed to reduce the monthly runoff of its Treasury bonds from $25 billion to $5 billion.