In recent minutes from a Federal Reserve meeting held earlier this month, officials expressed concerns that tariffs could exacerbate inflation, presenting challenges for interest rate policy. The minutes, released on Wednesday, indicate that worries about fiscal and trade policies remain prevalent among Federal Open Market Committee members.
During the May 6-7 meeting, the committee ultimately opted to maintain their current interest rates. The minutes reflect a consensus that increased uncertainty surrounding the economic outlook warrants a cautious approach until the full impact of government policy changes can be assessed.
“Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer,” the minutes noted. Participants also highlighted the potential challenges the committee might face if inflation becomes more persistent while growth and employment forecasts weaken.
While concerns about inflation and trade dynamics were voiced, officials acknowledged that economic growth remains “solid,” with the labor market considered “broadly in balance.” However, they recognized emerging risks that may lead to a weakening of labor market conditions, even as consumer spending continues to show strength.
Following the last rate cut in December, the FOMC has held its benchmark federal funds rate steady, maintaining a target range of 4.25% to 4.5%.
In their evaluation of monetary policy moving forward, participants agreed that solid economic growth, combined with a moderately restrictive policy environment, positions the committee well to await clearer insights on inflation and overall economic activity.
The post-meeting statement reinforced that uncertainty regarding the economic outlook is growing, and the committee’s capacity to achieve its dual mandates of full employment and low inflation is increasingly hindered by this uncertainty.
Since the conclusion of the meeting, officials have reiterated their intention to wait for greater clarity on fiscal and trade policies before contemplating any rate reductions. Market expectations reflect this sentiment, as futures traders are pricing in virtually no probability of a rate cut until the Federal Reserve’s next meeting in September.
Trade policy has also shifted since the last Fed gathering, with a recent easing of tariffs and a willingness from both the U.S. and China to discuss reducing the most burdensome duties during a 90-day negotiation period. This development has contributed to a rally on Wall Street, although bond yields continue to rise, an issue previously highlighted by Trump.
In the context of the ongoing trade conflict and signs of inflation moving closer to the Fed’s 2% target, Trump has urged Fed officials to lower rates. However, Fed Chair Jerome Powell has stressed that the Fed remains impervious to political pressures.
Additionally, the meeting included discussions surrounding the Fed’s five-year policy framework. Officials revisited their previous strategy of “flexible average inflation targeting,” which allows for temporary inflation rates above the 2% target to foster more inclusive labor market gains.
During their deliberations, officials acknowledged that this approach may have limited advantages in a context where the risks of significant inflationary shocks are high or when interest rates are not near the zero mark, as they were post-2008 financial crisis. Despite inflation surging following the pandemic, the Fed maintained low rates, which necessitated aggressive rate hikes later on.
The minutes also indicated a preference for policies that can withstand a diverse range of economic conditions, and officials reaffirmed their commitment to maintain the inflation target as it stands.
