Federal Reserve policymakers left their benchmark rate unchanged at 4.25 %–4.50 % on May 7, but newly released minutes expose deep unease about a possible mix of hotter inflation and rising joblessness.
“Almost all participants commented on the risk that inflation could prove to be more persistent than expected,” the document reveals.
Officials fretted that the economy may soon confront “difficult tradeoffs” between taming prices and supporting employment, a scenario that would test the central bank’s dual mandate.
Tariffs cloud the economic outlook
Staff economists warned that proposed import levies—topping out at 145 % on Chinese goods—could lift consumer prices markedly this year.
President Donald Trump has since delayed the steepest duties until July, but the minutes show policymakers were already bracing for fallout.
“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.”
Recession risk rises in internal models
Fed staff told governors that the probability of a downturn had grown “almost as likely as the baseline” of slow but positive growth.
Models foresee unemployment breaching the long-run natural rate before December and remaining elevated into 2027.
At the same time, tariffs could keep headline inflation above target, limiting the Fed’s capacity to slash rates aggressively.
Markets digest policy paralysis
Bond yields gyrated in the weeks preceding the meeting, prompting discussion of whether a “safe-haven premium” in the dollar might unwind if confidence erodes.
Minutes note that sustained volatility “warranted monitoring,” especially given the dollar’s pivotal role in global finance.
Equities have since stabilized on hopes that tariff negotiations will bear fruit, yet traders price only a 20 % chance of a July rate cut.
June projections will be pivotal
The Federal Open Market Committee reconvenes June 17–18 to publish updated growth, inflation, and rate forecasts.
At the March summary of economic projections, the median outlook anticipated two quarter-point cuts by year-end.
Several analysts now expect the so-called dot plot to show a wider dispersion, reflecting governors’ diverging views on how quickly tariffs could inflate consumer prices.
What could tip the scales
A decisive trade deal that trims planned levies might clear the way for modest easing in September.
Conversely, if negotiations stall and tariffs snap back to 145 %, policymakers may face a choice between defending price stability and cushioning a weakening labor market.
For now, Chair Jerome Powell has likened the situation to “driving through fog,” indicating the Fed will remain data-dependent until policy clarity emerges.