Federal Reserve policymakers have signaled that short-term interest rates will remain unchanged as they wait for clearer signs that inflation is nearing the U.S. central bank's 2% goal or until there is a whiff of a deteriorating job market.

The data so far has presented neither of those scenarios to the Fed, and though economists say the real drag from President Donald Trump's aggressive import tariffs lies ahead, there is a great amount of uncertainty over where the policies will end up and the degree and timing of their impact on prices and jobs.

"The cone of possibilities," as Cleveland Fed President Beth Hammack put it recently, is quite large, and includes the possibility of persistently higher inflation coupled with a slowdown in economic activity that would require the central bank to pick which battle to fight.

That dilemma has not stopped traders from betting that by June a faltering economy will likely move the Fed to resume its rate cuts, ultimately lowering borrowing costs by a full percentage point by the end of this year.

They added to those bets on Wednesday after data showed the U.S. economy shrank last quarter and the Fed's preferred measure of price inflation did not rise at all on a monthly basis in March.

INFLATION FALLS TO 2.3%

But while economists say such a rate-cutting scenario is not out of the question, they are quick to note that inflation remains elevated, and is likely to worsen at least temporarily as retailers raise prices to cover higher costs from the sharp increase in import levies.

The Personal Consumption Expenditures Price Index excluding volatile food and energy prices, which Fed officials feel maps best to where inflation is headed, eased to 2.6% in March from 3% in February, the data showed. The overall PCE fell to 2.3%.

Longer-term inflation expectations remain largely grounded, but a few Fed policymakers have taken note of a sharp rise in short-term inflation expectations that they worry could set the stage for a resurgence in price pressures.

"The Fed's in a very tricky spot; you have inflation that is already above target, you have inflation expectations that are, sort of showing that, perhaps they're becoming a little unhinged," said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. "And we're now waiting for the inflation to show up on the back of tariffs. I mean, the Fed is on hold."

At the same time, Fed policymakers are keenly focused on the potential for tariffs to slow the economy and potentially trigger layoffs, a situation that in the absence of persistent inflation would move them to cut rates, perhaps sharply. That's not evident so far.

'PERIOD OF STAGNATION'

The U.S. economy contracted by an annualized 0.3% last quarter in large part because U.S. businesses rushed to buy imported goods ahead of Trump's tariffs. The report also showed consumer spending down-shifted from a 4% growth pace last quarter to a still-decent 1.8%, and business investment soared.

The GDP report overall would allow the Fed to continue to characterize economic activity as "solid," though only in the rear-view mirror, said Gregory Daco, chief economist at EY Parthenon. "This shock is unlike anything we've seen before," Daco said.

"It's a massive self-imposed supply shock resulting from policy uncertainty, market volatility, surging tariffs and monetary policy inertia," Daco said.

The front-loading of demand in the first quarter, he said, sets the stage for a drop-off in demand this quarter, "a far more troubling phase of the ongoing economic slowdown."

Or as Pantheon Macro economists wrote, "A period of stagnation now likely lies ahead if the current set of tariffs is maintained, with recession the most likely outcome" if the sweeping import duties Trump announced on April 2 and then partially paused come into force in July.

The Trump administration, which this week eased some tariffs on automakers, says trade talks are ongoing. On Friday policymakers will get some of the first data on the current quarter, with the Labor Department's closely watched monthly jobs report expected to show a slowdown in hiring but no change in the 4.2% unemployment rate.

The Fed is nearly universally expected to hold its benchmark overnight interest rate in the current 4.25%-4.50% range at the end of a two-day policy meeting next week. Futures contracts that settle to the Fed's policy rate continue to suggest that the rate cuts would resume in June, with a total of four quarter-percentage-point reductions likely.

The U.S. central bank cut rates three times last year, for a total of 100 basis points of easing.