US Fed caught between inflation and job loss as tariffs cloud economic outlook

The Federal Open Market Committee May meeting minutes were released on Wednesday. US Federal Reserve officials anticipate rising inflation and unemployment, highlighting the potential for difficult tradeoffs and increased risks of a recession in the coming months.

The minutes showed authorities wrestling with a slew of questions regarding President Donald Trump’s tariffs and their economic impact. Finally, the committee’s 12 members voted unanimously to leave the central bank’s key federal funds rate unchanged, as predicted by financial markets.

The Federal Open Market Committee’s last monetary policy meeting was held on May 6-7, 2025, where the interest rates were kept unchanged at 4.25% to 4.5%.

“Participants observed that there was considerable uncertainty surrounding the evolution of trade policy as well as about the scale, scope, timing, and persistence of associated economic effects,” the minutes said. “Significant uncertainties also surrounded changes in fiscal, regulatory, and immigration policies and their economic effects. Taken together, participants saw the uncertainty about their economic outlooks as unusually elevated.”

The emphasis on “uncertainty” matched statements made by Fed Chair Jerome Powell during a press conference following the decision earlier this month, as well as speeches given by Fed officials in subsequent weeks.

Tariffs were expected to boost inflation markedly this year and to provide a smaller boost in 2026; after that, inflation was projected to decline to 2 percent by 2027, the Fed officials noted.

Central bank officials are in a fix and unable to decide whether to combat inflation with tighter monetary policy or cut interest rates to support growth and employment.

Fed policymakers have chosen a cautious stance, waiting to see how Trump’s unprecedented and unpredictable tariff campaign will affect the central bank’s dual aims of controlling inflation and unemployment. Fed officials and other experts have expressed fears that import levies will raise inflation while slowing the economy, jeopardizing job growth, and increasing unemployment.

The FOMC would need to take opposing stances in response to the two possible issues: rising inflation may put pressure on the Fed to maintain higher interest rates for an extended period, while rising unemployment would make it more compelling to lower interest rates in an attempt to stimulate the economy.