The combination of inflation and unemployment rising in tandem would leave central bank officials forced to decide whether to prioritize fighting inflation with tighter monetary policy or cutting interest rates to support growth and employment.
“Almost all participants commented on the risk that inflation could prove to be more persistent than expected,” as the economy adapted to higher import taxes proposed by the Trump administration.
“Participants noted that the (Federal Open Market) Committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken,” the minutes said. “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 prospect of rising unemployment and higher inflation was outlined in staff briefings that projected a “markedly” higher inflation rate this year due to the impact of tariffs and a job market “expected to weaken substantially” with the unemployment rate rising above long-run estimates of full employment by the end of this year and remaining there for two years.
The results of the May meeting and the more detailed account of it reflected in the minutes have since been overtaken by US President Donald Trump’s decision to delay the most aggressive tariffs, in particular the 145% levy on Chinese imports that threatened to grind a large share of global commerce to a halt.The shift caused many analysts to lower recessions risks that Fed staff as of early May had considered “almost as likely as the baseline” of slowing but continued growth.But in theory those stiff tariffs are only on hold until July pending negotiations over final tax rates that have kept Fed officials and business executives in the dark about the economic landscape they may face in the next few months.
The uncertainty still felt today was also the watchword at the meeting in early May, when the Fed decided to hold the benchmark policy rate steady in the 4.25% to 4.5% range. In a press conference after the meeting, Fed Chair Jerome Powell indicated the central bank was effectively sidelined until the Trump administration finalises its tariff plans and the impact on the economy becomes clearer, a view reiterated by Powell and other Fed policymakers in the weeks since.
As of early May officials also noted that volatility in bond markets in the weeks before the meeting “warranted monitoring”, and noted that a change in the US dollar’s safe-haven status, along with rising Treasury bond yields, “could have long-lasting implications for the economy”.
The Fed next meets on June 17-18, when the central bank will release new projections from policymakers about their outlook for inflation, employment and economic growth in coming months and years, and the projected interest rate they feel would be appropriate.
At their March meeting the median projection among policymakers was for two quarter point interest rate cuts by the end of 2025.
