The US Federal Reserve’s May meeting saw policymakers maintain their current wait-and-see approach to interest rates, despite uncertainty over the final outcome of trade policies. The minutes from the meeting, set to be released on Wednesday, may show officials grappling with the complexities of tariffs and their impact on the economy.
President Donald Trump’s announcement in early April of massive new import taxes sparked concerns over the economic fallout. However, a week later, some of the most aggressive tariffs had been lowered or postponed, reducing pressures that had driven bond yields sharply higher. The stock market also received a boost as analysts upgraded their growth forecasts due to the reduced tariffs.
Despite this development, Fed officials remain uncertain about the future, with Richmond Fed President Tom Barkin describing the situation as “driving through fog.” He noted that data for the year so far shows the economy on the same path as it has been, with low unemployment and inflation easing towards the Fed’s 2% target.
However, there are competing narratives among policymakers, including the possibility of a new jump in inflation or rising joblessness due to widespread uncertainty and rising costs. Until the economic direction becomes clearer, the Fed has little reason to alter its policy interest rate, which it has maintained at 4.25-4.50% since December.
Fed staff have been trying to estimate the impact of different tariff rules, but these reports are contingent on assumptions about final tariff levels, which may remain unknown until July when a reprieve on stiffest import taxes expires. Market optimism about the final outcome of the trade debate has been based on an expectation that negotiated deals with lower levies will be approved by then.
Until more information is available, investors anticipate the Fed holding the policy rate steady at the June and July meetings but cutting it in September and December. As Richmond Fed President Tom Barkin noted, “Until we know more about how this is going to settle out and what the economic implications are for employment and for inflation, I couldn’t confidently say that I know what the appropriate path will be.”
Source: https://www.reuters.com/business/minutes-feds-may-meeting-likely-show-officials-grappling-with-uncertainty-2025-05-28