FOMC Minutes: Federal Reserve Well-Positioned To Wait For Clarity On Outlook

Federal Reserve officials broadly agreed heightened economic uncertainty justified their patient approach to interest-rate adjustments, minutes from their latest policy meeting showed Wednesday.

Policymakers judged the risks of both higher unemployment and inflation had risen since their previous meeting in March, primarily due to the potential impact of tariffs. Such a scenario could pit the Fed's goals of stable prices and maximum employment against one another.

“Participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity,” the minutes of the Federal Open Market Committee's meeting ended May 7 said.

“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,” the minutes said.

The minutes underscored Fed officials' willingness to keep interest rates on hold for some time, as policy shifts in Washington cloud the economic outlook. Policymakers held the central bank's benchmark interest rate in a range of 4.25%-4.5% at the May meeting for a third consecutive time.

President Donald Trump's volatile trade policies are chief among the factors driving the uncertain outlook. The Fed's meeting this month took place just days before the US and China announced a temporary deal to lower levies on each other's products.

Even with the latest tariff reprieve, duties on imports remain historically elevated, and many businesses have put hiring and investment decisions on ice.

Economists broadly expect tariffs will boost inflation and weigh on economic growth, though several forecasters have reduced their expectations for a recession this year following the de-escalation with China.

Fed staff marked down their expectations for economic growth in 2025 and 2026, reflecting the announced trade policies, the minutes showed.

“The staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast,” the minutes said.

The staff forecasted the labor market to weaken “substantially,” with the unemployment rate rising above its so-called natural rate this year and remaining elevated through 2027. Tariffs were seen boosting inflation “markedly” this year.

Inflation Expectations

The minutes also reflected officials' heightened attention to Americans' expectations for long-term inflation, as they seek to guard against the possibility that any rise in prices related to tariffs could lead to lasting inflation.

“Almost all” participants noted the risk that inflation could prove more persistent than expected.

A University of Michigan measure of consumers' inflation expectations over the next five to 10 years has surged this year, largely due to tariffs. Fed officials have mostly downplayed that development and, citing market-based measures, argued inflation expectations remain well anchored.

“Participants noted that the committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken,” the minutes said, adding “that the ultimate extent of changes to government policy and their effects on the economy was highly uncertain.”