By Bryan Mena, CNN

Washington (CNN) — The Federal Reserve held interest rates steady again Wednesday as officials continue to wait for the fallout of President Donald Trump’s sweeping policy changes and tensions in the Middle East.

The central bank left its benchmark lending rate unchanged at a range of 4.25% to 4.5%, where it has been since January. Economists widely expect Trump’s erratic trade war to push up prices and eventually cause unemployment to climb.

So far, Trump’s tariffs have resulted in a surge of imports into the US, which has taken a toll on economic growth. However, inflation has been tame and the labor market remains in decent shape. Still, Fed officials don’t expect that to last: New economic projections show that officials expect unemployment to rise this year more than estimated in March — and for prices to pick up more than they previously thought.

Fed Chair Jerome Powell said in his post-meeting news conference that he expects Trump’s tariffs to eventually translate into higher inflation, but said the extent remains unclear. That will need to become apparent in order for the Fed to lower borrowing costs again, Powell said.

“We have to learn more about tariffs. I don’t know what the right way for us to react will be,” he told reporters. “I think it’s hard to know with any confidence how we should react until we see the size of the effects.”

US stocks took a dive after Powell said it’s difficult for the Fed to forecast with any confidence what the precise impact of tariffs will be on prices.

Fed policymakers overall continue to expect two rate cuts this year, according to the median projection, though seven of them expect no rate cut at all, up from four back in March.

Whenever the Fed deems it appropriate to deliver a rate cut, it’ll likely be because of rising unemployment — what investors refer to as a “bad news rate cut.” That’s because American consumers and businesses are expected to soon feel the sting of Trump’s tariffs, economists say, and there are already some potential signs of consumers becoming cautious with their spending.

Retail sales, which comprise a sizable chunk of overall spending, dropped sharply last month as car purchases plummeted. That’s key because consumer spending accounts for about two-thirds of the US economy.

Powell on tariffs

Powell stressed that there are still many knowns when it comes to tariffs, including what the impact on prices will be.

The Fed leader said that it’s possible that any inflation that comes about from tariffs proves to be just “temporary,” but that it could also be more persistent. He said the tariffs have already began to reverberate throughout the economy.

“So we’re beginning to see some effects. We expect to see more,” Powell said. “We’ve had goods inflation just moving up a bit, and, of course, we do expect to see more of that over the course of the summer.”

He added that “many, many companies do expect to put all or some of the effect of tariffs through to the next person in the chain, and, ultimately, to the consumer.”

The economy’s future overall, including for prices, largely depends on what happens with trade policy. The Fed in its policy statement said that uncertainty “has diminished” and Powell said that mostly reflects trade tensions easing from a fever pitch early in the spring, when Trump unveiled the sharpest escalation in US tariffs on data going back 200 years.

The Trump administration has so far brokered two trade agreements — with the United Kingdom and China — but the administration still has more than a hundred to go. Bilateral trade agreements typically take years of detailed discussions between countries, but Trump identified July 8 as his deadline to hash out deals with every US trading partner, before the massive tariff hikes he unveiled in early April go back into effect.

Treasury Secretary Scott Bessent last week said Trump will likely delay his tariffs even more for countries that are actively negotiating with the administration.

Powell on war in the Middle East

For now, Fed officials are inclined to wait longer for some clarity, not just on tariffs, but also to see whether a brewing conflict in the Middle East spirals out of control.

The Israel-Iran conflict that erupted last week has escalated in recent days, with the United States mulling military involvement. The conflict has already resulted in surging global oil prices, which could translate into higher prices in the US if there continue to be disruptions to global energy supply. And even if energy prices in the US climb, it’s a high bar for the Fed to go back to hiking interest rates.

In response to a question posed by CNN’s Matt Egan, Powell said it’s “possible that we’ll see higher energy prices” because of Israel-Iran conflict, but that “those things don’t generally tend to have lasting effects on inflation.”

“In the 1970s… you got a series of very, very large shocks, but we haven’t seen anything like that,” Powell said. “Now the US economy is far less dependent on foreign oil.”

Fed officials are also keeping tabs on the president’s tax and spending bill, currently being reviewed by the Senate. The provisions in the version of Trump’s megabill that passed the House would would boost the economy 0.8% over about three decades — compared to its estimate of 1.7% for the 2017 bill, the right-leaning Tax Foundation estimates.

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