Fed Minutes: Uncertainty in the economic outlook is abnormally high, tariffs will significantly push up inflation

Source: The Paper
On May 28 local time, the Federal Reserve released minutes of the May meeting, showing that the uncertainty of the economic outlook is unusually high. Overall, mainly due to the possible impact of tariff hikes, downside risks to employment and economic activities, and upside risks to inflation have increased.

However, the minutes of the meeting also pointed out that existing data show that economic activity continues to expand at a steady pace, labor market conditions are still good, but inflation levels are still slightly higher.

In terms of inflation, the minutes of the meeting pointed out that the information at the current meeting shows that consumer price inflation is still at a relatively high level. However, attendees' expectations for inflation were higher than forecasts for the March interest rate meeting. Tariffs are expected to significantly push up inflation this year, and the pushing effect in 2026 will weaken. In 2027, inflation is expected to drop to 2%.

In terms of the labor market, the minutes of the meeting believe that recent data shows that the labor market is still stable, but the labor market is expected to weaken sharply, and the unemployment rate is expected to exceed staff's assessment of their natural rate by the end of this year and will be higher than the natural rate by 2027.

In terms of economic activities, the meeting minutes pointed out that due to possible impacts on measurement issues, the US real GDP in the first quarter fell slightly. Real GDP growth in 2025 and 2026 is expected to be weaker than forecasts at the March meeting, as the announced trade policies drag on actual economic activity more than previously forecasts.

Data from the U.S. Department of Commerce shows that the U.S. GDP in the first quarter of 2025 shrank by 0.3% year-on-year. In the fourth quarter of 2024, U.S. GDP increased by 2.4% year-on-year. The U.S. Department of Commerce said on the same day that the shrinking GDP in the first quarter was mainly dragged down by a significant increase in imports and a decrease in government spending.

Data released by the U.S. Bureau of Labor Statistics showed that the U.S. CPI rose 2.4% year-on-year in March, lower than market expectations, and was 2.8% in the previous value; the core CPI rose 2.8% year-on-year, 3% lower than market expectations, and was 3.1% in the previous value; after the quarterly adjustment in April, the non-farm employment increased by 177,000, and the expected increase was 130,000, and the previous value was 228,000; the unemployment rate was 4.2%, the same as last month.

In the early morning of May 8, Beijing time, the latest Federal Reserve's interest rate resolution maintained the target range of the federal funds rate at 4.25%-4.5%, in line with market expectations. Previously, the Federal Reserve also maintained the above interest rates unchanged in March. Last year, the Federal Reserve cut interest rates by 100 basis points.


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