Could Trump's tariffs cause a recession?

Investors are growing increasingly concerned that President Donald Trump's tariff policies and federal layoff s could spark a U.S. recession. An even bigger worry is that the Federal Reserve might not be able to do much about it.

Officials on the Federal Open Market Committee (FOMC) are set to discuss at their March 1819 rate-setting meeting what more can be done — if anything — to control inflation and rescue a slowing economy within an increasingly volatile economic and political environment.

In a matter of weeks, Trump's post-election eff ect on the stock market has gone from "bump" to "slump." Americans' investment accounts have been getting pummeled, with the S&P 500 dropping more than 8% from its all-time high on Feb. 19. The tech-focused Nasdaq Composite Index plunged 4% alone on March 10, its worst day of trading since 2022. A measure of volatility within financial markets, meanwhile, spiked to the highest since August, reflecting investors' struggles to parse through Trump's stop-and-go tariff hikes.

To be sure, policymakers are almost certainly expected to leave borrowing costs alone this week. The Fed's chief central banker said as much in his final public comments before the committee's March meeting.

"Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place," Fed Chair Jerome Powell said at an event hosted by the University of Chicago on March 7. "We do not need to be in a hurry and are well positioned to wait for greater clarity."

Investors and consumers, though, will likely be looking for clues about what the FOMC expects to do the rest of the year. Along with its rate decision, the committee will also update its projections for economic growth, inflation, the job market and interest rates.

The stakes couldn't be higher for an economy still battered by post-pandemic inflation. In addition to weighing on economic growth, tariff s could also push up prices at a time when price pressures remain elevated. In a Fox News interview earlier in March, Trump didn't deny that his policies could spark a recession and urged Americans to brace for a "period of transition." The Trump administration has also signaled that it may press ahead with new tariff s even if they weaken the economy.

What do threats of weaker growth and higher inflation mean for the Fed's next moves? Here are the biggest questions facing the U.S. central bank as it decides what to do with the interest rates that influence how much you pay to borrow money.

Save the economy from a slowdown or keep inflation in check?

Typically, higher prices and a slower economy are counterintuitive. Inflation usually indicates that the financial system is redhot, a symptom of wage hikes or too much money chasing too few goods — similar to what happened during the pandemic.

They also both require something diff erent from the Fed. The U.S. central bank slashes the price of borrowing money when the financial system might be losing steam and raises interest rates when they want to cool the economy.

The rare combination, however, has happened before: in the 1970s and early '80s. Back then, prices soared almost twice as high as they did during the post-pandemic era, while the Fed intentionally inflicted a devastating U.S. recession — at the time, the worst since the Great Depression — to bring price pressures back down. Economists have a term for it that's become a dirty word for the Americans who lived through it: stagflation.

"The combination of policies that we are seeing right now has a real risk of bringing that on," says Erica Groshen, senior economic adviser at the Cornell University School of Industrial and Labor Relations, who was the former commissioner of the U.S. Bureau of Labor Statistics and vice president of research at the Federal Reserve Bank of New York.

Even St. Louis Fed President Alberto Musalem, who has a vote on interest rates this year, said in public remarks on Feb. 20 that a scenario where inflation rises at the same time the labor market weakens "must also be considered."

In those circumstances, the Fed's choices — rescuing the labor market or focusing on inflation — aren't easy.