Officials cautious as inflation risks rise and recession likelihood grows
US Federal Reserve officials were increasingly concerned that new tariffs and economic uncertainty could reaccelerate inflation while weakening growth, creating a policy dilemma that could force “difficult tradeoffs,” minutes from the Federal Open Market Committee’s (FOMC) May 6–7 meeting show.
The central bank voted unanimously to keep the federal funds rate in its current 4.25%–4.5% range, citing solid economic activity and stable labour markets. But officials highlighted a deteriorating outlook driven by government policy shifts, particularly trade and fiscal changes, that have made the economic path increasingly uncertain.
“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 stated.
Tariffs were a key concern. The Fed staff projected that recently announced trade policies—particularly US-China tariffs—would sharply boost inflation in 2025 and weigh on productivity and growth. Officials noted that many businesses were already planning to pass higher costs on to consumers, with some firms outside the scope of tariffs likely to follow suit.
Participants judged that labour market conditions remain broadly balanced, but acknowledged rising downside risks. The unemployment rate has held at 4.2%, and job growth was stable through March and April. However, business surveys revealed growing reluctance to hire or invest amid policy uncertainty.
The Fed also flagged concerns over longer-term inflation expectations. While still anchored near 2%, some participants worried about the risk of upward drift, especially after an extended period of elevated inflation and recent rises in short-term expectations.
The FOMC reaffirmed its commitment to the 2% inflation target and maintained its quantitative tightening program. While they remain prepared to act if necessary, members agreed that the current restrictive policy stance gives them room to “wait for more clarity” on inflation and economic momentum before making further moves.
Projections prepared by Fed staff indicated the possibility of a recession was “almost as likely as the baseline forecast,” with the unemployment rate expected to remain above its natural rate through 2027. Inflation is forecast to return to 2% by that year, but with considerable risk of persistence in the near term.
The next FOMC meeting is scheduled for June 17–18.
