Minutes of the US Fed Meeting: Trump Created Uncertainty, US Economy Faces Risk of Stagflation

On Wednesday local time, the US Fed released the minutes of its March monetary policy meeting on its official website. The minutes revealed that Fed policymakers almost unanimously agreed at last month's meeting that the US economy faces the risk of simultaneous rising inflation and slowing growth, known as stagflation. The meeting minutes showed that nearly all Fed officials believed inflation risks were tilted to the upside, while employment risks were tilted to the downside. Some policymakers noted that the Fed might face "difficult trade-offs." The March 18-19 meeting was held before the Trump administration imposed comprehensive tariffs, which significantly increased uncertainty about the economic outlook and led participants to favor a "cautious approach." Officials stated that if inflation persists, they could choose to maintain higher interest rates for a longer period, or if a weak economy requires more immediate attention, they could opt to cut interest rates. The Federal Open Market Committee (FOMC) last month kept the target range for the federal funds rate unchanged at 4.25%-4.5%, but still indicated that it might cut rates later this year. At that meeting, Fed officials significantly lowered their US GDP growth forecast for this year, expecting economic growth of only 1.7%. However, subsequent actions by the Trump administration have rendered those forecasts outdated. Trump's tariffs caused a sharp decline in US stocks, with the Nasdaq briefly entering a technical bear market, and many economists believe the US economy will fall into recession this year. Fed Chairman Powell stated in a speech on April 4 that the tariff increases were significantly larger than expected, which would push up inflation and reduce economic growth, but it was "too early" to adjust monetary policy. The day before, as reciprocal tariffs took effect, the yield on the 10-year US Treasury briefly surged above 4.5%, and US Treasury Secretary Bessent described the sell-off in US Treasuries as "normal deleveraging." The unpredictability of the Trump administration has rendered all forecasts "obsolete." Fed officials noted that uncertainty surrounding Trump's policies and their potential impact on the economy is increasing. In March, Fed officials had already begun to worry about the risk of "repricing." "Some participants warned that the repricing of financial market risks could amplify the impact of negative shocks on the economy." Additionally, the minutes showed that last month the Fed decided to significantly slow the pace of balance sheet reduction, but several participants believed there was no compelling reason for this move. Fed Governor Waller opposed the decision to adjust the balance sheet policy, pointing out that the banking system still has sufficient reserves to maintain the monthly reduction in the balance sheet unchanged. For a long time, there has been uncertainty about how long the Fed's quantitative tightening process could last. Recently, a report by Goldman Sachs economists predicted that the end point might come sometime in Q3 this year. Meanwhile, Morgan Stanley forecasters believe that, given the already slowed pace of balance sheet reduction, quantitative tightening could extend into next year.