MNI: Fed Well-Placed To Assess Tariff Effects- May Minutes

Federal Reserve officials believe they can take their time in assessing the effects of fluid tariff policies, though they fear larger-than-expected tariffs will raise inflation and hurt employment, according to minutes of their May meeting released Wednesday. 

The FOMC said it is "well positioned to wait for more clarity on the outlooks for inflation and economic activity."

Increased uncertainty about the outlook makes it "appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer," the minutes said.

Officials noted downside risks to employment and economic activity and upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases.

The committee "might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken," the minutes said. 

Policymakers think inflation is likely to move higher as a result of tariffs but expressed wide uncertainty around those effects. 

"Almost all participants commented on the risk that inflation could prove to be more persistent than expected," the minutes said. 

"Many participants remarked that reports from their business contacts or surveys indicated that firms generally were planning to either partially or fully pass on tariff-related cost increases to consumers. Several participants noted that firms not directly subject to tariffs might take the opportunity to increase their prices if other prices rise."

Officials also took note of increased market volatility following the tariff announcement in early April and its subsequent reversal. 

"Some participants commented on a change from the typical pattern of correlations across asset prices during the first half of April, with longer-term Treasury yields rising and the dollar depreciating despite the decline in the prices of equities and other risky assets," the report said.

"These participants noted that a durable shift in such correlations or a diminution of the perceived safe-haven status of U.S. assets could have long-lasting implications for the economy."

The Fed will next meet in June, when it will release a new Summary of Economic Projections. The March SEP showed a median of two rate cuts for 2025, GDP growth of 1.7%, and core PCE inflation at 2.8% by year-end. Tariffs are widely seen as dampening economic activity while pushing inflation higher, at least in the near term. 

Markets are currently pricing in two quarter-point cuts in the federal funds rate, which has been at 4.25-4.5% since December, toward the end of the year.