Federal Reserve Meeting Minutes Highlight Increased Economic Uncertainty and Potential Difficult Trade-offs

On May 28, the Federal Reserve released the minutes of its May 6–7 Federal Open Market Committee (FOMC) meeting, emphasizing heightened economic uncertainty and the need for cautious policy adjustments. The Committee agreed to maintain the federal funds rate target range at 4.25%–4.5%, reaffirming its commitment to the 2% long-term inflation goal. Policymakers stressed the importance of waiting for clearer indications of the economic impact from policies such as the Trump administration’s tariffs before considering further action, particularly rate cuts.

The minutes underscore several economic challenges: the core PCE price index rose 2.6% year-on-year in March, remaining above the Fed’s target despite a decline from peak levels. Some members expressed concerns that tariffs, especially on intermediate goods, could contribute to more persistent inflation. Short-term inflation expectations increased, though long-term expectations remained broadly stable. The labor market showed steady job growth with unemployment stable at 4.2%, but hiring slowed amid policy uncertainty, and wage growth moderated to a 3.4% increase in the Employment Cost Index.

Economic growth faced headwinds in the first quarter, with a slight GDP contraction mainly due to a surge in imports as firms prepared for tariffs, which weighed on net exports. Consumer spending continued growing, but confidence indicators deteriorated, and trade policy uncertainty dampened business investment, particularly in manufacturing and among smaller firms. Financial markets saw volatility, with rising long-term Treasury yields, flat equity indexes, widening credit spreads, and a weaker U.S. dollar. Globally, central banks such as the European Central Bank and Mexico’s central bank moved toward easing policies in response to trade risks, increasing policy divergence.

The Fed’s cautious stance reflects concerns that inflation and unemployment could rise simultaneously, creating “difficult trade-offs” in monetary policy. Officials anticipate that tariffs will cause inflation to “significantly” increase this year, while the labor market is expected to weaken substantially, with unemployment rising above the long-term full employment level and remaining elevated through at least 2027. Forecasts for real GDP growth in 2025 and 2026 were revised downward compared to March, reflecting the drag from trade policies. These policies are also expected to slow productivity growth and widen the output gap over the forecast horizon.

The next FOMC meeting is scheduled for June 17–18, where the Committee will continue evaluating economic developments and the necessity for policy adjustments.