Federal Reserve Meeting Minutes: Increased uncertainty calls for cautious rate cuts, almost everyone mentioned inflation risks, reiterating there may be "difficult trade-offs".

"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 Journal

The minutes of the meeting show that at the earlier meeting this month, the Federal Reserve (FED) decision-makers generally believed that the uncertainty faced by the economy is higher than before, and it is appropriate to remain cautious regarding interest rate cuts, waiting for the effects of policies such as tariffs from the Trump administration to become clearer before considering action.

Moreover, in this minutes, nearly all Federal Reserve decision-makers expressed concerns about tariffs driving up inflation in the long term. Following the minutes from the last meeting in April, officials once again warned that the Federal Open Market Committee (FOMC) may have to make a "difficult trade-off" between fighting inflation and preserving employment.

Journalist Nick Timiraos, known as the "New Federal Reserve News Agency," pointed out that in the minutes of this meeting, Federal Reserve decision-makers hinted that they are concerned that a significant increase in tariffs could drive up prices and potentially stimulate inflation. Given the increasing uncertainty surrounding tariff policies, Fed officials reiterated the need to adopt a "cautious approach."

Timiraos stated that the minutes show that Federal Reserve (FED) policymakers generally believe that economic uncertainty has increased, and the risks of both rising unemployment and inflation have also increased. This leads them to maintain their wait-and-see policy stance.

Reiterate that we are fully capable of taking action once the economic and inflation outlook becomes clearer.

At the monetary policy meeting held three weeks ago, the Federal Reserve (FED) decided to continue pausing interest rate cuts, warning of stagflation risks, stating that the risks of increasing unemployment and inflation have risen, and reiterating the increase in "uncertainty" regarding the economic outlook. The minutes of the meeting released on Wednesday, May 28, Eastern Time, stated that when discussing the outlook for monetary policy,

"The participants unanimously agreed that, given the robust economic growth and labor market, and the current moderate restrictive nature 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 of the economic outlook has further increased, therefore, it is appropriate to adopt a cautious approach until the net economic effects of a series of government policy adjustments become clearer.

Participants pointed out that monetary policy will be influenced by a series of upcoming data, economic outlook, and risk balance.

Compared to the content discussed in the previous meeting minutes regarding the outlook for monetary policy, this time's minutes mainly added cautious remarks due to increased uncertainty in the economic outlook, emphasizing that monetary policy is influenced by data, future economic conditions, and risk balance, reiterating that there is full capability to act once the economic and inflation outlook becomes clearer.

"Almost all" mention the risk of more persistent inflation reiterating the difficult trade-offs between inflation and the economy.

In the last summary, during the discussion of risk management considerations that could affect the outlook for monetary policy, some participants pointed out that if inflation proves to be persistent while growth and employment prospects weaken, the FOMC may face "difficult tradeoffs." This summary shows that the same considerations of risk management were discussed.

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

Participants emphasized that it is crucial to ensure that long-term inflation expectations remain well anchored, and some participants pointed out that inflation expectations may be particularly sensitive due to inflation being persistently above the FOMC's target. The minutes then again mentioned the "difficult trade-offs":

"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 final adjustment magnitude of the Trump administration's policies and their impact on the economy are very uncertain. A few participants also noted that higher uncertainty may dampen business and consumer demand, and if the downside risks to economic activity or the labor market materialize, it could suppress upward pressure on inflation.

19 mentions of uncertainty state that the economic outlook uncertainty is "exceptionally high"

Similar to the last meeting minutes, "uncertainty" remains a key term in this minutes. Wall Street Observer noted that the last minutes mentioned "uncertainty" 21 times throughout the entire text, while this time it appears 19 times. In these 19 instances, it either refers to high uncertainty or mentions a large amount of uncertainty, or that uncertainty has increased.

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

Participants believe that "the announced increase in tariffs so far exceeds their previous expectations in both magnitude and scope."

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

Some people believe that tariffs or stimulus will continue to push inflation upward. Many have mentioned that inflation factors may ease.

The meeting minutes show that during this month's meeting, some Federal Reserve participants assessed that imposing tariffs on intermediate goods could contribute to sustained inflation. A few 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 may help alleviate the potential rise and persistence of inflation, such as ongoing trade negotiations that could reduce the extent of tariff increases, decreased tolerance for price hikes among American households, economic weakness, a reduction in immigration leading to less housing inflation pressure, or some companies wishing to increase market share rather than raise prices of goods not affected by tariffs.

The Federal Reserve staff's GDP growth expectations for this year and next are below the March forecast, expecting the labor market to be "significantly weak."

The minutes of the meeting revealed that this month the staff of the Federal Reserve (FED) revised their expectations for U.S. real GDP growth for the next two years downward from March, as the announced trade policies imply that the drag on actual economic activity is larger than previously predicted by the staff. It is anticipated that the 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 projected to be higher than the natural unemployment rate estimated by staff by the end of this year, and remaining above the natural unemployment rate level until 2027.

Some people point out that the correlation pattern of asset prices changed in April. If this shift persists, it may have long-term effects.

Last month, the U.S. financial markets experienced a triple whammy of stocks, bonds, and currency, with U.S. assets being sold off across the board. In this meeting minutes, while discussing financial stability, The Federal Reserve (FED) decision-makers noted that the vulnerabilities in the financial system are worth monitoring, and they also discussed the market volatility issues from April.

The minutes stated that some participants discussed the issue of increased volatility in the asset markets during the first half of April, and noted that "despite a decline in liquidity indicators, the market continues to operate and can withstand a surge 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 attendees pointed out that the typical pattern of asset price correlations changed in the first half of April, with stock prices and other risk assets declining, while long-term government bond yields rose, and the dollar depreciated.

These participants pointed out that the lasting shift in this correlation or the decline of the United States as a safe haven for assets may have long-term effects on the economy.