Trump’s trade war threatens the U.S. economy. Minneapolis Fed president sees ‘no easy choices.’

The Federal Reserve is in a bind.

President Donald Trump has been pressuring the central bank to lower interest rates, even as tariffs he’s imposing on U.S. trading partners threaten to raise inflation.

Consumers and businesses are anxious about what the escalating trade war might do to the economy and are pulling back on spending — a reaction that itself could cause a downturn.

Unlike in the 2008 and 2020 recessions, there’s nothing the Fed can do.

“There simply are no economic tools that the Fed has that can undo the economic impact of a tariff or trade war because it pushes up inflation, and it pushes down economic activity,” said Neel Kashkari, president of the Federal Reserve Bank of Minneapolis. “In ‘08 and in COVID, you had an economic downturn and lower inflation, so at least our tools could work in the same direction. Now, because this type of stress causes divergent impacts in the economy, it really puts us in a difficult position.”

Interest rates are one of the few levers the Fed can pull to either kick-start the economy or slow it down, with the goal of keeping prices stable and unemployment low. When inflation is high, the central bank raises rates to slow spending and tame prices.

That strategy won’t work this time, Kashkari said in an interview Monday.

After raising rates to a 22-year high in the aftermath of the COVID-19 pandemic, the Fed started making cuts late last year. But inflation is still above the Fed’s 2% target, and economists agree tariffs will likely push it back up as companies raise prices to help cover the cost of the new taxes.

The U.S. collected tariffs — taxes on imported goods — before Trump’s second term began in January, including some the president imposed during his first term.

What’s different now is the size, scope and speed. Though most of the record-high tariffs Trump announced this month are on pause, the rate on Chinese imports is 125%. The baseline for most other imports is 10%.

Trump’s on-again, off-again trade policy has whipsawed the markets and bruised consumer sentiment. The New York Fed released consumer survey data Monday showing respondents expect higher inflation and unemployment and lower household income in the year ahead.

“I don’t think any of us know where these trade negotiations are ultimately going to end up, and what is the effective tariff rate going to be?” Kashkari said. “Last week, when the president announced a pause, markets rallied, but then the next day, people had done the math and figured out, oh, the effective tariff rate is still very, very, very high, still the highest in 100 years.

“And so I think that that uncertainty that people are feeling is warranted. We feel the same uncertainty at the Fed — we don’t know where this is going to settle out.”

Though Trump’s public pressure on the Fed has raised concerns about the central bank’s ability to stay independent and nonpartisan, Chairman Jerome Powell and other bank officials have repeated that economic indicators, not politics, will influence its decision-making.

“Politicians often express opinions about where rates should go,” Kashkari said. “I think Chair Powell has done an excellent job, in his terms, keeping us all aligned on our economic goals and focusing on data and making decisions based on data, and I’m confident that’s going to continue.”

For now, the Fed is in wait-and-see mode. That means pressure of both higher prices and higher borrowing costs — a one-two punch that hits hardest for the Americans least able to withstand it.

“It’s a real challenge, and it speaks to the limited tools that we have at the Fed,” Kashkari said. “Because if we said, ‘Well, we’re not going to keep inflation in check,’ you might be able to boost the labor market a little bit, but then prices are running higher for everybody. And so there are no easy choices.”