US Fed Meeting Minutes: Inflation and Unemployment Risks Rise, Ready to Wait for Clearer Outlook

On Wednesday local time, the US Fed released the minutes of its May monetary policy meeting on its official website. The minutes showed that Fed officials believed they might face a "difficult trade-off" in the coming months, with both inflation and unemployment rising, and increased economic uncertainty justifying a cautious monetary policy stance.

The meeting minutes indicated that policymakers judged that the risks of both rising unemployment and inflation had increased since the March resolution, primarily due to the impact of Trump's tariff policies.

This situation could create a conflict between the Fed's goals of price stability and full employment, forcing members to decide whether to prioritize tightening monetary policy to combat inflation or to support economic growth and employment by cutting interest rates.

Participants agreed that, given the continued solidity of economic growth and the labour market, along with the current moderately tight monetary policy, the Federal Open Market Committee (FOMC) had the flexibility to wait for greater clarity on the outlook for inflation and economic activity.

However, it was evident that uncertainty about the economic outlook had further increased, and thus officials believed it was appropriate to adopt a cautious stance until the economic impacts of the Trump administration's series of policy changes became clearer.

The meeting minutes highlighted the willingness of Fed officials to maintain interest rates unchanged for a period, as policy changes in Washington cast a shadow over the economic outlook. At the May meeting, the FOMC kept the target range for the federal funds rate unchanged at 4.25%-4.5% for the third consecutive time.

Following the interest rate decision this month, Trump made progress in trade negotiations with other countries. On May 8, Trump announced the outline of a new trade agreement with the UK. Subsequently, China and the US also agreed to significantly reduce tariffs on each other's goods.

Despite this, US tariff rates remained at historically high levels, forcing many companies to put hiring and investment decisions on hold. Therefore, as the US economy adjusted to the higher tariffs proposed by the Trump administration, nearly all participants indicated that inflation might be more persistent than expected.

The US Fed projected that, due to the impact of tariffs, inflation would rise "significantly" this year, while the job market was "expected to weaken substantially."

Economists generally expected that tariffs would push up inflation and drag down economic growth, though they also lowered their expectations for a recession following the easing of trade tensions.

The meeting minutes mentioned that Fed staff's forecasts for real GDP growth in 2025 and 2026 were lower than those presented at the March meeting, as the announced trade policies implied a greater drag on real economic activity relative to the policies assumed in staff's previous forecasts. It is expected that trade policies will also lead to a slowdown in productivity growth, thereby reducing potential GDP growth in the coming years.

As of early May, officials also noted that the volatility in the US bond market in the weeks preceding the meeting was "worthy of attention," and pointed out that changes in the US dollar's safe-haven status, along with rising US Treasury yields, could have long-term impacts on the economy.

The meeting also discussed the US Fed's five-year policy framework. Fed Chairman Powell stated that officials agreed on the need to reassess the key factors surrounding employment and inflation in the current monetary policy approach.

The Fed's next meeting will be held from June 17 to 18, at which time the Fed will release policymakers' new forecasts for inflation, employment, and economic growth prospects over the coming period, as well as their expectations for interest rates that they deem appropriate. The market currently expects that the likelihood of an interest rate cut before the September meeting is almost zero.