Federal Reserve Minutes: Higher uncertainty is suitable for cautious rate cuts, almost all members mentioned inflation risks, reiterating that there may be "difficult trade-offs."

The meeting minutes show that at a meeting earlier this month, Federal Reserve policymakers generally believed that the uncertainty facing the economy is higher than before, and that it is appropriate to remain cautious regarding interest rate cuts, waiting for clearer impacts from tariffs and other policies of the Trump administration before considering action.

Moreover, in this set of minutes, almost all Federal Reserve policymakers expressed concerns about tariffs driving inflation in the long term. Following the minutes from the last meeting in April, this set of minutes again highlighted that the Federal Open Market Committee (FOMC) may have to make "difficult tradeoffs" between combating inflation and maintaining employment.

Journalist Nick Timiraos, known as the "new Federal Reserve correspondent," pointed out that this set of minutes underscores the Fed's concerns about rising prices, as they worry that significant tariff increases could push prices higher. Given the increasing uncertainty surrounding tariff policies, Fed officials reiterated the need for a "cautious approach." The minutes indicate that Federal Reserve policymakers generally believe that increased economic uncertainty raises the risks of both unemployment and inflation, which prevents them from changing their wait-and-see policy stance.

Increased Uncertainty in Economic Outlook Calls for Caution

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

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

Participants noted that monetary policy will be influenced by a series of upcoming data, economic outlooks, and risk balances."

Compared to the content discussed in the last meeting minutes regarding the outlook for monetary policy, this set of minutes mainly added remarks about the appropriateness of a cautious attitude due to increased uncertainty in the economic outlook, emphasizing that monetary policy is influenced by data, future economic conditions, and risk balances.

"Almost All" Mentioned the Risk of More Persistent Inflation, Reiterating Difficult Tradeoffs Between Inflation and Economy

In the last minutes, when discussing 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 set of minutes shows that when discussing risk management considerations,

"Participants unanimously agreed that the risks of rising inflation and unemployment 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, with some participants noting that due to inflation being persistently above the FOMC's target, inflation expectations may be particularly sensitive. The minutes then again mentioned "difficult tradeoffs":

"Participants pointed out that if inflation proves to be more persistent while economic growth and employment prospects weaken, the (FOMC) committee may face difficult trade-offs."

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

19 mentions of uncertainty, stating that economic outlook uncertainty is "unusually high"

Like the last meeting minutes, "uncertainty" remains a key term in this minutes. Wall Street Insight noted that the last minutes mentioned "uncertainty" 21 times, while this minutes has 19 mentions. In these 19 instances, it either refers to high uncertainty or states that there is a lot 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 tariff increases in terms of magnitude and scope have far exceeded their previous expectations.

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

Some believe tariffs may boost persistent inflation, many mention potential easing of inflation factors

The meeting minutes show that during this month's discussion on the impact of inflation, some Federal Reserve participants assessed that imposing tariffs on intermediate goods may contribute to persistent inflation. A few participants pointed out that supply chain disruptions caused by tariffs may also continue to affect inflation, reminiscent of similar impacts during the COVID-19 pandemic.

Several participants emphasized factors that may help alleviate the potential magnitude and persistence of rising inflation, such as ongoing trade negotiations that may reduce the extent of tariff increases, American households' decreasing tolerance for price increases, economic weakness, reduced immigration leading to less housing inflation pressure, or some companies wishing to increase market share rather than raise prices on goods unaffected by tariffs.

Fed staff's GDP growth expectations for this year and next are below March forecasts, expecting labor market to "weaken substantially"

The meeting minutes disclosed that the Federal Reserve staff's expectations for U.S. real GDP growth for this year and next are lower than those in March, as the announced trade policies imply that the drag on actual economic activity is greater than previously predicted by the staff. It is expected that trade policies will also lead to a slowdown in productivity growth, thereby reducing potential GDP growth in the coming years.

The staff expects that the labor market will weaken substantially, with the unemployment rate expected to be above the staff's estimate of the natural unemployment rate by the end of this year and to remain above the natural unemployment rate level until 2027.

Some pointed out that the correlation pattern of asset prices changed in April; if persistent, it may have long-term effects

Last month, the U.S. financial market experienced a triple whammy of stock, bond, and currency sell-offs, with U.S. assets being sold off across the board. In this Minutes, when discussing financial stability, Federal Reserve policymakers noted that the vulnerabilities in the financial system are worth monitoring, and they also discussed the market volatility in April.

The Minutes stated that some participants discussed the issue of intensified asset market volatility in the first half of April, noting that "despite the decline in liquidity indicators, the market continues to operate and is able to withstand a surge in trading volume." Several participants pointed out that the resilience of the U.S. Treasury market is particularly important, which has been a focus of attention for many years. The Minutes then mentioned:

"Some participants noted that the typical pattern of asset price correlations changed in the first half of April, with stock and other risk asset prices declining, while long-term Treasury yields rose, and the dollar depreciated.

These participants indicated that this persistent shift in correlation or the decline in the safe-haven status of U.S. assets could have long-term implications for the economy."