Notes from the Federal Open Market Committee's May session revealed Federal Reserve officials deliberating over a litany of uncertainties pertaining to President Donald Trump's tariffs and their potential repercussions on the economy. Officials in unanimous agreement decided to hold the central bank's essential federal funds rate steady, as anticipated by financial markets.
"Participants noted substantial ambiguity associated with the trajectory of trade policy along with the size, duration, and persistence of its economic implications," the minutes recounted. Issues with fiscal, regulatory, and immigration policies, including their economic impacts, also presented significant uncertainties.
Federal Reserve Chair Jerome Powell had placed emphasis on "uncertainty" in a press conference held after the decision, echoing sentiments expressed by Fed officials in later speeches.
Central bank policymakers adopted a prudent approach, waiting to ascertain how Trump's unpredictable tariff campaign might impact the institution's dual aims of regulating inflation and unemployment. There have been concerns that the import taxes will spur inflation while also slowing down the economic growth, thereby posing a risk to job creation and potentially causing an increase in unemployment. If inflation rises significantly, the Federal Reserve would be under pressure to maintain high interest rates, whereas a surge in unemployment would necessitate lower interest rates to stimulate the economy.
Observing the potential predicament, these confidential minutes came as no surprise to those closely following the Federal Reserve. Pantheon Macroeconomics's senior U.S. economist Oliver Allen noted, "These minutes bring no new insights about the Fed's recent thoughts shared in Chair Powell’s post-meeting press conference and other FOMC members' speeches in the past few weeks. Pronounced uncertainty around trade policy, threats to both the Fed's employment and inflation goals, and the higher medium-term risks on either side of the dual mandate are all motivating the FOMC to hold on and wait for more information."