"New Federal Reserve News Agency": The Fed hints at concerns that tariffs will drive up inflation, and given the increased uncertainty surrounding tariff policies, the Fed reiterates the need to adopt a "cautious approach."

Written by: Li Dan

Source: Wall Street Insights

The meeting minutes show that at the earlier meeting this month, Federal Reserve policymakers generally believed that the uncertainty facing the economy is higher than before, and it is appropriate to remain cautious regarding interest rate cuts, waiting for clearer impacts from the Trump administration's tariffs and other policies before considering action.

Moreover, in this set of minutes, nearly all Fed policymakers expressed concerns about the long-term inflationary pressures from tariffs. Following the last meeting minutes in April, this set of minutes again warned that the Federal Open Market Committee (FOMC) may have to make "difficult trade-offs" between combating inflation and maintaining employment.

Nick Timiraos, a reporter known as the "New Federal Reserve News Agency," pointed out that in this set of minutes, Fed policymakers hinted that they are worried that significant tariff increases could raise prices and potentially stimulate upward inflation. Given the heightened uncertainty surrounding tariff policies, Fed officials reiterated the need to adopt a "cautious approach."

Timiraos stated that the minutes indicate that Fed policymakers generally believe that increased economic uncertainty raises the risks of both unemployment and inflation. This leads them to maintain a wait-and-see policy stance.

Reiterating the ability to wait for clearer economic and inflation outlooks before taking action

At the monetary policy meeting held three weeks ago, the Fed decided to continue pausing interest rate cuts, warning of stagflation risks, and stated that the risks of rising unemployment and inflation have increased, reiterating the increased "uncertainty" regarding the economic outlook. The minutes released on Wednesday, May 28, Eastern Time, stated that when discussing the monetary policy outlook,

"Participants unanimously agreed that, given the robust economic growth and labor market, and the current moderate restrictiveness of monetary policy, the (FOMC) committee is fully capable of waiting for a clearer outlook on inflation and economic activity.

Participants unanimously agreed that the uncertainty surrounding the economic outlook has further increased, thus adopting a cautious approach is appropriate until the net economic effects of a series of government policy adjustments become clearer.

Participants noted that monetary policy will be influenced by a series of upcoming data, economic outlooks, and risk balances."

Compared to the discussions in the last meeting minutes regarding the monetary policy outlook, this set of minutes mainly added language indicating that a cautious attitude is appropriate due to increased economic uncertainty, emphasizing that monetary policy is influenced by data, future economic conditions, and risk balances, reiterating the ability to wait for clearer economic and inflation outlooks before taking action.

"Almost all" mentioned the risk of more persistent inflation, reiterating the potential for difficult trade-offs between inflation and the economy

In the last minutes, when discussing risk management considerations that could affect the monetary policy outlook, some participants pointed out that if inflation proves to be persistent while growth and employment prospects weaken, the FOMC may face "difficult trade-offs." This set of minutes shows that when discussing risk management considerations,

"Participants unanimously agreed that the risks of rising inflation and unemployment have increased. Almost all participants commented on the risk that inflation may be more persistent than expected."

Participants emphasized the importance of ensuring that long-term inflation expectations remain well anchored, with some participants noting that due to inflation being persistently above the FOMC's target, inflation expectations may be particularly sensitive. The minutes then mentioned "difficult trade-offs" again:

"Participants noted that if inflation proves to be more persistent while economic growth and employment prospects weaken, the (FOMC) committee may face difficult trade-offs."

Participants pointed out that the ultimate adjustments of the Trump administration's policies and their economic impacts are highly uncertain. A small number of participants also noted that higher uncertainty may suppress business and consumer demand, and if the downside risks to economic activity or the labor market materialize, it could suppress upward inflationary pressures.

19 mentions of uncertainty, stating that economic outlook uncertainty is "unusually high"

Like the last meeting minutes, "uncertainty" remains a key term in this set of minutes. Wall Street Insights noted that the last minutes mentioned "uncertainty" 21 times, while this set of minutes has 19 mentions. In these 19 mentions, it either refers to high uncertainty, indicates a large amount of uncertainty, or states that uncertainty has increased.

The minutes stated that when commenting on the current situation and economic outlook,

Participants believe that "the announced tariff increases in terms of magnitude and scope have far exceeded their previous expectations.

The changes in fiscal, regulatory, and immigration policies and their economic impacts also carry significant uncertainty. Overall, participants believe that the uncertainty surrounding their economic outlook is unusually elevated."

Some believe tariffs may drive inflation to persist, while many mention potential factors to ease inflationary pressures

The meeting minutes show that during the discussion of inflation's impact at this month's meeting, some Federal Reserve participants assessed that tariffs on intermediate goods could contribute to persistent inflation. A small number of participants pointed out that supply chain disruptions caused by tariffs could also continue to affect inflation, reminiscent of similar impacts during the COVID-19 pandemic.

Several participants emphasized some factors that could help mitigate the potential magnitude and persistence of inflation, such as ongoing trade negotiations that may reduce the extent of tariff increases, American households' decreasing tolerance for price increases, economic weakness, reduced immigration leading to less housing inflation pressure, or some businesses preferring to increase market share rather than raise prices on goods unaffected by tariffs.

Fed staff's GDP growth expectations for this year and next are lower than March's forecast, expecting the labor market to "weaken substantially"

The meeting minutes disclosed that the Federal Reserve staff's expectations for U.S. real GDP growth for this year and next are lower than those in March, as the announced trade policies imply that the drag on actual economic activity is greater than previously predicted by staff. It is expected that trade policies will also lead to a slowdown in productivity growth, thereby reducing potential GDP growth in the coming years.

Staff expect the labor market to weaken substantially, with the unemployment rate expected to be above the staff's estimated natural rate of unemployment by the end of this year and to remain above the natural rate until 2027.

Some noted changes in asset price correlation patterns in April, which could have lasting effects if persistent

Last month, the U.S. financial markets experienced a simultaneous sell-off in stocks, bonds, and currencies. In this set of minutes, when discussing financial stability, Federal Reserve policymakers believe that the vulnerabilities in the financial system warrant monitoring, and they also discussed the issues of market volatility in April.

The minutes stated that some participants discussed the intensified volatility in asset markets during the first half of April, noting that "despite declining liquidity indicators, the market continues to operate and is able to withstand surges in trading volume." Several participants pointed out that the resilience of the U.S. Treasury market is particularly important, as it has been a focus of attention for many years. The minutes then mentioned:

"Some participants noted that the typical patterns of asset price correlation changed in the first half of April, with stock and other risk asset prices falling while long-term Treasury yields rose, and the dollar depreciated.

These participants indicated that this persistent change in correlation or the decline in the U.S. asset's safe-haven status could have long-term implications for the economy."

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