"Focus" The Federal Reserve acknowledges that inflation and unemployment may rise simultaneously, facing difficult trade-offs -- May Meeting Minutes

"Focus" Federal Reserve acknowledges the risk of rising inflation and unemployment simultaneously, facing difficult trade-offs -- May meeting minutes

The Federal Reserve believes the risks to both targets are increasing

The Federal Reserve decided to keep interest rates unchanged in May due to uncertainty

After the May meeting, the most extreme tariffs were suspended

Reuters Washington, May 28 - Minutes from the Federal Reserve's May 6-7 meeting show that policymakers acknowledged they may face "difficult trade-offs" in the coming months, namely the possibility of rising inflation and unemployment. Concerns about financial market volatility and warnings from Fed staff about rising recession risks further support this outlook.

Since then, this ominous outlook may have changed, as President Trump decided to postpone severe import tariffs, including a 145% tariff on Chinese goods, a week after the meeting. These tariffs had previously led to rising government bond yields, falling stock markets, and widespread predictions of a recession in the U.S. economy.

The minutes released on Wednesday show that Federal Reserve policymakers and staff had significant discussions about the potential impacts of the Trump administration's changing policies—despite the highest tariffs being shelved, they have not been completely canceled.

Policymakers noted during the meeting that the volatility in the bond market in the weeks prior "needs to be monitored," as it could pose risks to financial stability, and pointed out changes in the dollar's safe-haven status, as well as rising U.S. Treasury yields, which "could have long-term effects on the economy."

Federal Reserve policymakers continued to point out that the possibility of simultaneous increases in inflation and unemployment is a risk that may force them to decide whether to prioritize tightening monetary policy to curb inflation or to cut interest rates to support economic growth and employment.

As the economy adapts to the higher import tariffs proposed by the Trump administration, "almost all participating policymakers indicated that inflation may be more persistent than expected."

"Participating policymakers noted that if inflation proves to be more persistent while economic growth and employment prospects weaken, the (Federal Open Market) Committee may face difficult trade-offs," the minutes show. "Participating policymakers unanimously agreed that uncertainty regarding the economic outlook has further increased, and therefore it is appropriate to adopt a cautious approach until the net economic impact of a series of government policy changes becomes clearer."

Dual Risks

Federal Reserve staff outlined the outlook for rising unemployment and inflation in a briefing. The briefing projected that inflation would rise "significantly" this year due to the impact of tariffs, while the job market "is expected to weaken significantly," with the unemployment rate rising above the full employment estimate by the end of this year and remaining at that level for two years.

As of April, the U.S. unemployment rate was 4.2%. Federal Reserve policymakers believe that a rate of 4.6% represents a long-term sustainable level when inflation stabilizes at the 2% target.

After Trump postponed the most aggressive tariffs on China and other countries, many analysts lowered their estimates of recession risks. As of early May, Federal Reserve staff believed that this possibility was "almost as likely as their baseline outlook of a slowing but still ongoing economic growth."

At the May meeting, the Federal Reserve decided to keep the target policy interest rate range unchanged at 4.25% to 4.5%, and the uncertainty that the meeting focused on continuesAt the press conference following the meeting, Chairman Powell stated that the Federal Reserve could only take a wait-and-see approach until the Trump administration finalizes its tariff plans and the impact on the economy becomes clearer. In the following weeks, Powell and other decision-makers reiterated this view.

The Federal Reserve's next meeting will be held on June 17-18, during which decision-makers will announce new forecasts for inflation, employment, and economic growth prospects for the coming months and years, as well as their expectations for appropriate interest rates