The Federal Reserve’s May 6-7 meeting minutes revealed central bank officials grappling with unprecedented uncertainty about how President Trump’s tariff policies will affect the U.S. economy.
The minutes showed Fed staff now view a recession as “almost as likely” as their baseline forecast, marking a much darker assessment than their previous March meeting.
The Fed is essentially caught in a policy dilemma:
Tariffs could push inflation higher (which would normally call for keeping interest rates high), while simultaneously slowing economic growth and increasing unemployment (which would normally call for cutting interest rates to stimulate the economy).
This creates what officials called potential “difficult tradeoffs” in monetary policy decisions.
What’s particularly noteworthy is how Chairman JPow and his team positioned themselves for various scenarios. Some members noted they could pause any rate cuts if inflation proved sticky, while others mentioned the possibility of accelerating cuts if the labor market took a turn for the worse.
But the overarching message was clear – no predetermined path, no automatic moves, just careful analysis of the data as it comes in.
Key concerns from the FOMC minutes include:
- Fed economists now project that Trump’s trade policies will drag down economic growth more than previously expected, with effects lasting several years
- Tariffs are expected to “boost inflation markedly this year” and keep it elevated, with the Fed’s 2% inflation target not reached until 2027
- The unemployment rate is projected to rise significantly by year-end and stay high through 2027
- Nearly all Fed officials worried that inflation could become more stubborn than expected, as businesses plan to pass tariff costs directly to consumers
- Many companies not even affected by tariffs might use the situation as cover to raise their prices, amplifying the inflationary impact
Link to FOMC Meeting Minutes (May 2025)
Fed officials were also spooked by unusual market behavior during April’s tariff volatility. Normally, when stocks fall, investors flee to “safe haven” U.S. Treasury bonds, and the dollar strengthens. Instead, Treasury yields rose and the dollar weakened alongside falling stocks, a pattern that concerned policymakers about America potentially losing its status as the world’s go-to safe investment.
Given all this uncertainty, Fed officials unanimously decided to keep interest rates unchanged at 4.25% to 4.5%, adopting a wait-and-see approach.
They’re essentially walking a tightrope – trying to balance the risks between acting too quickly, which could derail their progress on inflation, and moving too slowly, which might unnecessarily hamper economic activity.
Looking ahead, traders can expect the Fed to maintain this deliberate approach.
The minutes indicated that if the data evolves as expected, with inflation continuing its path toward 2% and the economy maintaining its strength, the Committee would favor moving gradually toward a more neutral stance. However, they’ve kept their options wide open, ready to adjust course if economic conditions warrant a change in strategy.
Market Reactions
U.S. Dollar vs. Major Currencies: 5-min
Overlay of USD vs. Major Currencies Chart by TradingView
The dollar’s reaction to the FOMC meeting minutes was muted, suggesting that markets had likely already priced in the Fed’s measured approach to uncertainty.
Earlier in the day, the Greenback was propped up by risk-off sentiment and worries about Trump’s potential tariffs, but it started to slip just before the London session wrapped up.
Even with the Fed expressing serious concerns about both inflation and recession risks, the minutes didn’t do much to shake expectations for potential rate cuts later in the year. Add to that some likely profit-taking ahead of upcoming economic data releases, and you’ve got more reasons for the late-day dip in the dollar.
By the end of the session, USD held onto gains against most major currencies, though it struggled to keep up with relative strength in other safe-haven assets.
The subdued market reaction also reflects recent developments that have eased some tariff fears, including Trump’s decision to lower China tariffs from 145% to 30% and the temporary trade truce between the world’s two largest economies.
Feed from Babypips.com