Trade policies drag the economy beyond expectations, and sustained inflation may put decision-making in a dilemma.

Author: Jeff Cox; Source: CNBC Key Points:

• The minutes of the Federal Open Market Committee (FOMC) meeting from May 6 to 7, released on Wednesday, indicate that the Federal Reserve continues to be concerned about the direction of fiscal and trade policies.
• The minutes of the meeting noted: "Participants indicated that if inflation persists while economic growth and employment prospects weaken, the committee may face difficult trade-offs."
• Since the last rate cut in December of last year, the FOMC has maintained the target range for the federal funds rate at 4.25%-4.5%, with officials believing that the current policy is well-suited to address existing risks.

The minutes of the meeting released by the Federal Reserve on Wednesday show that officials were concerned that tariffs could exacerbate inflation and create a dilemma in interest rate policy during the meeting earlier this month.

The minutes of the Federal Open Market Committee meeting from May 6 to 7 reflect the Federal Reserve's ongoing concerns about the direction of fiscal and trade policies, and officials ultimately decided that the best course of action is to keep interest rates stable.

The meeting minutes stated: "Participants unanimously agreed that the uncertainty surrounding the economic outlook has increased further, and therefore, it is appropriate to adopt a cautious attitude until the net economic impact of various government policy changes becomes clearer." The minutes also mentioned: "Participants pointed out that if inflation persists while economic growth and employment prospects weaken, the committee may face difficult trade-offs."

Despite policymakers' concerns about the unpredictable trends in inflation and trade policies, they still express that economic growth is "robust," the labor market is "generally balanced," although there are risks of potential weakening, and consumer spending continues.

Since the last rate cut in December of last year, the FOMC has kept its target range for the federal funds rate unchanged at 4.25%-4.5%.

The meeting minutes summarized: "In considering the outlook for monetary policy, the participants unanimously agreed that, given the robust economic growth and labor market, along with the current moderate restrictions of monetary policy, the committee is fully capable of waiting for inflation and economic activity prospects to become clearer."

The post-meeting statement pointed out that "the uncertainty of the economic outlook has further increased." In addition, the committee stated that due to policy uncertainty, achieving the dual goals of full employment and low inflation has become more complicated.

Since this meeting, Federal Reserve officials have repeatedly stated that they will wait and will not consider cutting interest rates again until fiscal and trade policies become clearer. The market expectations have also responded accordingly, with futures traders currently almost certain that the Federal Reserve will not cut interest rates before the September meeting.

Since the last meeting of the Federal Reserve, trade policies have also changed.

After both China and the United States agreed to pause most of the tariffs imposed on each other and enter a 90-day negotiation period, the tariffs and ongoing friction between the two countries eased somewhat a few days after the Federal Reserve meeting. This, in turn, helped Wall Street's stock market rise, although bond yields continued to climb, which is exactly what President Donald Trump has been trying to curb.

Amid signs that the trade war and inflation are slowly approaching the Federal Reserve's 2% target, Trump has been pressuring Federal Reserve officials to cut interest rates. However, Fed Chairman Jerome Powell has stated that the Federal Reserve will not be influenced by political interference.

The meeting also discussed the Federal Reserve's five-year policy framework.

When officials last looked at their long-term policy, they instituted what they called "flexible average inflation targeting," which essentially asserts that officials can allow inflation to be above their 2% target for a period of time, provided that they promote more inclusive labor market gains.

During the discussion, officials noted that if there is a "significant risk of a massive inflationary shock," or if interest rates are not close to zero, as was the case in the years following the 2008 financial crisis, the "benefits of the strategy will wane." The Fed kept interest rates low despite soaring post-COVID inflation, forcing them to later raise interest rates aggressively.

The meeting minutes pointed out that the policy should be "resilient to various economic environments." Officials also stated that they have no intention of changing the inflation target.