FED: The "Transitory" Inflation Theory Didn't Have Much Traction In May

The Committee's discussion of the inflation outlook is worth reading in full (see below). In short, it doesn't seem as though there was any participant who argued any way forcefully for the potentially "transitory" inflation outcome of tariffs. 

• The vast majority were focused on multiple upside risks, with a small nod to factors that might mitigate inflation - including weaker growth. It's not even clear Gov Waller made the case for a one-off shock to inflation from tariffs, which he has repeated multiple times in public appearances. The minutes make only one reference to this ("Almost all participants commented on the risk that inflation could prove to be more persistent than expected" though later there is mention of one of Waller's arguments which seem to have been shared "A few participants additionally noted that higher uncertainty could restrain business and consumer demand and that inflationary pressures could be damped if downside risks to economic activity or the labor market materialized").
• As such we read the inflation discussion at the May meeting as hawkish, reinforcing the idea that the Fed will wait a considerable amount of time before determining the impacts of tariffs.
• The main discussion eyed multiple ways higher goods prices via tariffs could translate into higher inflation: "With regard to the outlook for inflation, participants judged that it was likely to be boosted by the effects of higher tariffs, although significant uncertainty surrounded those effects. 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. Some participants assessed that the recent increase in short-term inflation expectations, as indicated by various survey- and market-based measures, or the fact that the economy had gone through a period of high inflation recently could make firms more willing to raise prices. While most indicators had suggested that longer-term inflation expectations remained well anchored, some participants saw the risk that they could drift upward, which could put additional upward pressure on inflation. Some participants assessed that tariffs on intermediate goods could contribute to a more persistent increase in inflation. A few participants noted that supply chain disruptions caused by tariffs also could have persistent effects on inflation, reminiscent of such effects during the pandemic."
• On the more "optimistic" side of the inflation debate: "Several participants highlighted factors that might help mitigate the magnitude and persistence of potential increases in inflation, such as reductions of tariff increases from ongoing trade negotiations, less tolerance for price increases by households, a weakening of the economy, reduced housing inflation pressures from lower immigration, or a desire by some firms to increase market share rather than raise prices on items not affected by tariffs."