WASHINGTON (Reuters) -Federal Reserve officials say they want a clearer picture of the U.S. economy's direction before deciding their next interest rate move, but data since the central bank's last meeting have made the outlook arguably even more confusing as trade and other policies remain unsettled.

In a sort of ink blot test about the future, policymakers at a two-day meeting that ends on Wednesday could cite a downturn in first-quarter gross domestic product and declines in business and consumer confidence to make a case that rate cuts may be needed sooner than later. Or they could cite still-strong employment data, healthy consumer spending and an anticipated tariff-driven jump in inflation as a reason to wait. 

Either choice is risky until President Donald Trump's policies become more clear, which makes it likely that the policy-setting Federal Open Market Committee will leave rates unchanged when it announces its latest policy decision at 2 p.m. EDT (1800 GMT), while continuing to acknowledge the limits of what it can say about the future.

Investors currently expect the policy rate to remain in the 4.25%-4.50% range until the Fed's July 29-30 meeting.

"Incoming data are neither good nor bad enough to force the FOMC to reveal its intentions," wrote Steve Englander, head of macro strategy for North America at Standard Chartered. "Doing nothing and saying less is probably a welcome option ... when there is so much uncertainty on fiscal and tariff policies and their ultimate economic and asset-market consequences."

MIXED INFLATION SIGNALS

Like much about Trump's import tariffs, the impact on inflation may not be known for months. It won't be until July when the president decides whether to impose the most aggressive duties on goods from dozens of countries, and the final levies on imported autos and other items also are up in the air.

Court challenges could prevent some of Trump's orders from being enacted even if he decides to proceed. 

In the meantime, though, inflation as measured by the Personal Consumption Expenditures Price Index the Fed uses to set its 2% inflation goal slowed in March to 2.3%, the lowest rate in about half a year.

That easing of price pressures has prompted calls from Trump for the Fed to cut rates, but it doesn't tell the full story. Measures of underlying inflation, excluding volatile food and energy prices, remained much higher at above 2.6% in March.

In addition, the tariffs are expected to add to inflation as the year progresses, requiring Fed officials to judge whether newly rising prices will prove to be one-off adjustments or more persistent. They got that wrong in 2021 when they thought inflation would fade, and don't want to be caught out again.

Fed Chair Jerome Powell "has been clear that if push comes to shove, he will ensure inflation is tamed before cutting rates," Diane Swonk, chief economist at KPMG, wrote this week.

Powell is due to hold a press conference half an hour after the release of the Fed's policy statement on Wednesday.

EMPLOYMENT GROWTH MAY SLOW

Fed officials and others who watch the job market closely say they expect hiring to slow soon and the unemployment rate to rise. 

The surprises keep coming, however, with data last week showing employers added 177,000 jobs in April, well above economists' expectations.

The jobless rate remained steady at 4.2%, a number considered around full employment even though it is higher than the historically low levels seen in the last half of the Biden administration.

Even though businesses have grown skeptical about the outlook, as long as hiring continues the Fed will have less reason to consider reducing rates until it is clear the inflation risk is gone. 

GDP DIRECTION

Fed officials thought economic growth was slowing after several quarters above trend, and that might even be helpful in the fight to bring inflation to 2%. 

But the economy since Trump returned to office actually shrank. While the first-quarter contraction was due to a surge of imports perhaps meant to beat new tariffs that drove the trade deficit to a record high in March, it also poses tricky questions for the months ahead. 

If inventories are flush, will companies try to sell the goods fast and cheap, with potential shortages down the road as stiffly levied imports from China dwindle? Or will firms raise prices towards what it would cost to bring in goods under the tariffs as a way to ration supply? 

When one quarter's GDP is influenced by a particular component, that often gets offset later: Imports could well plummet in coming months, providing a passive boost to growth since imports are subtracted from exports in measuring U.S. output. 

But if consumption also slows, as many expect is beginning to happen because of uncertainty and expected cost increases, that could be an even-greater offsetting drag.

Understanding how all the parts fit together into a narrative of slow growth, better-than-expected growth or recession will be a challenge. 

'SOFT' DATA

Fed officials profess to be data-dependent, reliant on channeling hard economic statistics into their forecasting models to guide interest rate decisions. But in moments when the economy is buffeted by policy or other unpredictable shocks they also turn elsewhere.

In recent months they have put particular weight on "soft" data, derived from surveys or one-on-one interviews with corporate officials and other economic decision-makers, to help anchor policy views.

On that front, the landscape has turned sour - even ugly.

One widely cited measure of uncertainty, mapped from analysis of news reports, currently rivals levels at the onset of the COVID-19 pandemic.

The Fed's most recent "Beige Book" collection of anecdotal reporting from its 12 regional districts cited "uncertainty" 80 times and called it "pervasive." The report was rife with references to rising prices, layoffs starting in some industries, and businesses saying they were stymied in hiring and investment decisions because of trade policy.

"It is not unusual for hard data to lag significantly in event-driven downturns ... It is notable that the soft data ... have already fallen more than in the typical event-driven recession," Jan Hatzius, chief economist at Goldman Sachs, wrote this week.

That observation followed a recent roundtable with reporters in Washington during which Hatzius said: "We've been in an environment ... that has generated a large amount of uncertainty, and so far it hasn't diminished."