The FOMC minutes from the May 6–7 meeting highlighted growing anxiety among policymakers about the dual threat of persistent inflation and deteriorating growth prospects, largely stemming from US trade policies.

Nearly all participants flagged the risk that inflation could be “more persistent than expected” as the economy adjusts to elevated import tariffs. This situation, they warned, could force the Fed into “difficult tradeoffs” if inflation stays stubborn while growth and employment begin to falter.

The Committee agreed that uncertainty surrounding the economic outlook had “increased further”, justifying a cautious stance on monetary policy, “until the net economic effects of the array of changes to government policies become clearer.”

Fed staff revised their GDP projections lower for 2025 and 2026, citing a larger-than-anticipated drag from recent tariff announcements. Beyond the short-term impact, officials also warned of longer-term structural effects, with trade restrictions likely to slow productivity growth and reduce the economy’s potential “over the next few years.”

The labor market outlook has also darkened, with staff forecasting the unemployment rate to rise above its “natural rate” by year-end and remain elevated through 2027.

Inflation forecast was revised higher, with tariffs seen boosting prices notably in 2025, before gradually easing. Inflation is still expected to return to 2% by 2027, but the path there is now more complicated.

Full FOMC minutes here.

New York Fed President John Williams emphasized the importance of acting decisively to prevent inflation from becoming entrenched, warning that delayed responses risk making price pressures permanent.

Speaking at a conference in Tokyo, Williams noted, “you want to avoid inflation becoming highly persistent because that could become permanent”.

“And the way to do that is to respond relatively strongly” when inflation begins to deviate from target.

He also highlighted the sensitivity of inflation expectations, cautioning that any significant shift could be “detrimental” to economic stability.

Speaking at the IMES conference in Japan, Minneapolis Fed President Neel Kashkari addressed the growing internal debate within Fed over how to respond to the inflationary effects of new US tariffs.

He noted that some policymakers advocate “looking through” these price shocks, viewing them as “transitory”, akin to a one-time upward shift in the price level rather than persistent inflation. That approach would favor cutting interest rates to support economic activity during the adjustment period.

However, Kashkari expressed skepticism toward this lenient view. He emphasized that trade negotiations are “unlikely to be resolved quickly”., warning of a prolonged period of elevated uncertainty and the risk of retaliatory measures.

Tariffs on intermediate goods could lead to delayed but persistent inflationary pressure as cost increases pass through to final goods over time.

Given these risks, Kashkari said he finds the case for holding rates steady more persuasive, especially in light of the need on “defending long-run inflation expectations”.

While current policy is likely “only modestly restrictive”, he argued that caution is warranted until the full effects of tariffs become clearer.

Full speech of Fed’s Kashkari here.

Minneapolis Fed President Neel Kashkari warned today that major shifts in US trade policies are clouding the outlook for monetary policy, making it difficult for the Fed to move on interest rates before September.

While “anything is possible,” Kashkari said in an interview with Bloomberg TV, he’s unsure whether the picture will be “clear enough” by then. Much hinges, he added, on whether trade negotiations between the US and its partners yield concrete deals in the coming months, which could “provide a lot of the clarity we are looking for.”

The uncertainty, Kashkari explained, is weighing on economic activity. He emphasized the stagflationary nature of the tariff shock, noting that its impact will depend on both the scale and duration of the levies.

On financial markets, Kashkari acknowledged that rising US Treasury yields might reflect a broader reassessment by global investors about the risks of holding American assets. He suggested that the current bond market reaction could signal a new global paradigm.

Chicago Fed President Austan Goolsbee emphasized a cautious stance on monetary policy, citing the high level of uncertainty surrounding the economic outlook.

Speaking on CNBC, Goolsbee said “everything’s always on the table,” but that the bar for further action is “a little higher” until more clarity emerges.

He flagged the stagflationary effects of trade policy shifts as a key concern, calling such an environment “the central bank’s worst situation,” and adding that policymakers will need to closely assess how much tariffs push prices higher.

While markets are pricing in two Fed cuts this year, likely starting in September Goolsbee avoided committing to any timeline.

He stressed the need for flexibility, saying, “I don’t like even mildly tying our hands at the next meeting.” Still, he maintained that, heading into April 2, inflation appeared to be easing and the labor market was stable, conditions under which interest rates could “come down a fair amount” over the next 12 to 18 months.