May FOMC Minutes Released
Concerns Over Conflict Between Price Stability and Full Employment Goals
Monetary Policy in a "Good Position" to Monitor Tariff Effects
Members of the U.S. Federal Reserve (Fed) have expressed concern that President Donald Trump's tariff policies are making it more difficult to conduct monetary policy. With rising macroeconomic uncertainty, they agreed that the two policy goals of price stability and full employment could come into conflict, and therefore, it would be prudent to hold off on lowering interest rates for the time being and closely monitor economic conditions.
According to the minutes of the Federal Open Market Committee (FOMC) meeting held in May this year, released by the Fed on the 28th (local time), the members unanimously stated, "Given the increased uncertainty regarding the economic outlook, it is appropriate to take a cautious approach until the purely economic effects of changes in government policy become clearer."
The minutes also warned, "Participants noted that if the outlook for growth and employment weakens and inflation persists, the Fed's two policy goals could face a difficult trade-off," adding, "The final scope of government policy changes and their economic impact remain highly uncertain."
Previously, at the FOMC meeting held on the 7th, the Fed kept the benchmark interest rate unchanged for the third consecutive time at 4.25% to 4.5% per year. This decision reflected the intention to closely monitor the economic impact of President Trump's tariff policies, which are fueling concerns about stagflation (rising prices amid economic stagnation), before considering a resumption of monetary easing.
The Fed assessed that the current economic situation is generally favorable. The minutes stated, "Economic growth is solid, and the labor market is broadly balanced." However, they noted that the possibility of labor market weakening is gradually increasing.
The Fed judged that the current monetary policy is in a "good position" to respond cautiously while observing economic indicators.
The minutes explained, "Participants believe that economic growth and the labor market remain robust, and that the current monetary policy stance is moderately restrictive," adding, "Participants agreed that they are in a good position to wait until the outlook for inflation and economic activity becomes clearer."
This meeting also included discussions on the framework for monetary policy over the next five years.
Five years ago, the Fed adopted the so-called "flexible average inflation targeting" approach, revising its monetary policy framework to tolerate temporary increases in inflation. However, at this meeting, members assessed that the effectiveness of this policy is limited when the risk of inflation shocks is high or when interest rates are not at zero. The members emphasized the need for a robust policy design that can withstand various economic environments. They also agreed that there is no intention to change the current 2% inflation target.
Meanwhile, Wall Street expects that, as the Fed maintains a cautious stance on monetary easing, the earliest possible resumption of rate cuts would be in September. According to CME FedWatch, the federal funds futures market reflected a roughly 59% probability that the Fed would cut rates by at least 0.25 percentage points in September. The probability of rates remaining unchanged stood at about 41%. The likelihood of just one rate cut within the year is projected at 30%, while the probability of two rate cuts is estimated at 39%.
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