The Federal Reserve held US interest rates steady on Wednesday, extending its rate-cut pause as it warned tariffs could lead to higher inflation and unemployment.
Wednesday was the third consecutive time the Fed held rates steady, keeping the range of its benchmark rate unchanged at 4.25 per cent to 4.50 per cent.
The UAE Central Bank also kept its benchmark interest rate at 4.40 per cent after the Fed's decision.
After the announcement, Fed chairman Jerome Powell said risks of higher unemployment and higher inflation have increased, bringing a difficult decision for the Fed to make in the coming months.
"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," Mr Powell told a news conference.
"We may find ourselves in the challenging scenario in which our dual mandate goals are in tension," he said, referring to price stability and maximum employment.
Elevated uncertainty
Before this week's meeting, Fed officials were widely expected to keep US interest rates unchanged, with questions over Mr Trump's tariffs still unanswered.
Meanwhile, the US President has accused the Fed of being too slow to cut interest rates and has also increased his attacks on Mr Powell.
Since the Fed's previous meeting in March, Mr Trump has increased duties charged on all US trading partners with a 10 per cent universal tariff. However, he scaled back harsher “reciprocal” tariffs on dozens of countries.
At the same time, Mr Trump boosted the US-China trade war by levying tariffs of 145 per cent on Chinese imports. China retaliated by imposing a 125 per cent tariff on US imports.
"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," Mr Powell said.
Most of the data the Fed has received in recent months has come before the tariffs took effect, although the economy is showing signs of strength and weakness.
"The best course of action for the [Fed] may simply be to wait for more clarity about trade policy and its implications for the US economy," Wells Fargo chief economist Jay Bryson wrote to clients.
Strong data, negative sentiment
Drawing the most alarm was a first-quarter report on the nation's gross domestic product. Data showed that the US's GDP shrank by 0.3 per cent due to a surge in imports, as businesses tried to get ahead of anticipated inflationary effects from the tariffs.
"Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace," the Fed said.
Economists generally argue that the supply shock from tariffs will lead to both higher inflation and lower growth, which will create tension with the Fed's dual mandate of price stability and maximum employment.
That could put the Fed in an uncomfortable position of having to choose between moving to reduce inflation or prevent a recession.
So far, that uncertainty has not resulted in layoffs. Data last week showed that US jobs growth for March exceeded expectations, with the unemployment rate remaining a stable 4.2 per cent.
"It's still a healthy economy, albeit one that is shrouded in some very downbeat sentiment on the part of people and businesses," Mr Powell said.
The Fed's preferred inflation metric also slowed in March to 2.3 per cent on an annual basis, not far from its 2 per cent target. However, that data came in before tariffs took effect.
Mr Powell did not offer guidance on future decisions the Fed might make in June, its next meeting.
"What I would say is that we think our policy rate is in a good place as well division to respond in a timely way to potential developments," he said.