Fed Minutes Show Officials Worried Over Stagflation Risk Ahead Of Tariffs

Federal Reserve officials pointed to the risk of stagflation at their meeting last month, a scenario in which economic growth slows even as inflation remains stubbornly high.

Almost all Fed officials viewed “risks to inflation as tilted to the upside and risks to employment as tilted to the downside,” according to the minutes of the March 18-19 Federal Open Market Committee meeting.

The minutes, released Wednesday in Washington, showed how officials were grappling with the risks that President Donald Trump's trade policies pose to their goals of stable prices and maximum employment ahead of his April 2 tariff announcement. Inflation has been above the Fed's target since March 2021.

Some officials saw “difficult tradeoffs if inflation proved to be more persistent while the outlook for growth and employment weakened,” the minutes said.

US central bankers left their benchmark lending rate unchanged in a range of 4.25% to 4.5% last month, highlighting increased uncertainty around the economic outlook.

Officials marked up their expectations for inflation and downgraded their 2025 growth forecasts at that gathering. Those projections, however, will be seen as already outdated.

The March meeting was held before Trump rolled out a series of tariffs on US trading partners, sending stock prices into double-digit losses and causing some economists to pencil in recession forecasts for this year.

Fed Chair Jerome Powell said in an April 4 speech the tariff increases were “significantly larger than expected.” He added, “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”

The market shock from Trump's actions has been severe.

Interest rates on the US 10-year Treasury note, a benchmark for longer-term financing, briefly surged above 4.5% Wednesday as the latest wave of tariffs took effect. US Treasury Secretary Scott Bessent called the selloff in Treasuries “normal deleveraging.”

Tariffs are expected to push up inflation, at least in the near-term, but some officials have also warned second-round effects could spark persistent price pressures.

Balance Sheet

The record of the meeting also shed some light on the Fed's decision to slow the pace at which it's reducing the size of its balance sheet. Officials reduced the monthly cap on Treasury securities that roll off without reinvestment to $5 billion from $25 billion. The cap on agency and mortgage-backed securities was unchanged at $35 billion.

Several officials didn't see a compelling case for slowing the pace of the runoff, according to the minutes.

“A number of participants commented that the Committee's existing tools could also be used to help address potential disruptions to the market for reserves,” the minutes said.

Governor Christopher Waller dissented against the balance-sheet adjustment, noting the banking system still has enough reserves to keep its monthly runoff of Treasury securities unchanged.

The decision to slow the unwinding has led some Wall Street strategists to push out their expectations for how long the central bank's runoff will go on.

The committee also continued the ongoing review of their monetary policy framework.

Officials changed their framework in 2020 to avoid preemptively cooling the labor market in anticipation of price pressures, instead choosing to wait until higher inflation appeared.

The minutes indicated officials think its appropriate to reconsider that stratetgy.