Minutes from the May meeting of the Federal Reserve’s interest rate-setting committee show stagflationary risk to the economy as a result of new White House trade policies and higher projections for unemployment through the next couple of years.
Fed bankers weighed in with their outlook for the economy in the middle of Trump’s tariff blitz, prior to the trade truce with China earlier this month that paused mutually imposed triple-digit tariffs.
However, the decidedly cooler outlook is likely to factor into the Fed’s next formal summary of economy projections (SEP) as the White House pushes ahead with numerous bilateral trade deals.
Officials felt that “the labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff’s estimate of its natural rate by the end of this year and remaining above the natural rate through 2027.”
The Fed projected in March an unemployment rate of 4.4 percent for 2025 and of 4.3 percent for 2026 and 2027. The May minutes suggest those numbers will be higher.
Inflation projections were higher and growth projections lower than the ones put out in the March SEP. Inflation was expected to hit a 2.7-percent annual increase this year, and growth was forecast to be 1.7 percent.
Both inflation and gross domestic product (GDP) growth have ticked downward in the latest readings from the Labor and Commerce Departments.
Prices in the personal consumption expenditures (PCE) index eased to a 2.3-percent annual increase in March, down from 2.7 percent in February. They’re also at 2.3 percent in the consumer price index (CPI), off a recent high of 3 percent in January.
GDP fell off a cliff in the first quarter as companies pulled in imports ahead of expected tariffs. The advance estimate of first-quarter GDP showed it contracting by 0.3 percent after rising 2.4 percent in the fourth quarter of last year.
The Fed’s May minutes show bankers expecting diminished productivity growth as a result of White House tariff policies, which are expected to take a further bite out of GDP in the coming years.
“Trade policies were also expected to lead to slower productivity growth and therefore to reduce potential GDP growth over the next few years,” they say.
The Fed has maintained a pause on interest rate cuts amid policy uncertainties. The Fed delivered three rate cuts in the back half of last year before halting them in January and leaving them at a range of 4.25 to 4.5 percent since then.
Commentators noted in the minutes that officials thought inflationary pressures could ease if employment conditions weaken enough.
“Some [officials] noted that heightened uncertainty could curb demand, and that inflation pressures may ease if downside risks to activity, or the labor market materialize,” EY economist Gregory Daco wrote in a commentary.
