FOMC Minutes Highlight Talks on Heightened Inflation Risks — Evening Brief – 04.09.25
Since the last FOMC meeting, markets have seen intense turbulence. Government bonds have swung across an 80-basis-point range, stocks have experienced sharp jolts, commodities have plummeted, gold has posted strong gains, and the dollar has held steady, all amid a surge of volatility sparked by the administration’s tariff policies.
Meanwhile, expectations for rate cuts have jumped from roughly two to four or five this year, and funding markets are showing signs of instability. In the three weeks following the FOMC meeting, hard economic data has strengthened considerably, while soft data has weakened.
The minutes capture a Fed on edge, prescient about tariff-driven inflation but unsure about how to react to the administration’s tariff policies. A nod to stagflation aligns with some economist warnings, while Chair Jay Powell’s flexibility hints at rate-cut readiness if jobs falter. The runoff debate underscores the tension over liquidity as markets remain braced for the tariff fallout.
That said, Federal Reserve officials noted a heightened risk of tariff-driven inflation during their March 18-19 Federal Open Market Committee meeting, per minutes released Wednesday, though they were unaware then of the scale of tariffs the administration would enact in early April.
Nearly all participants saw inflation risks leaning upward and employment risks trending downward, with some noting potential tough tradeoffs if inflation lingered while growth and job prospects dimmed. Certain FOMC members highlighted the possibility of a “stagflation” scenario, characterized by rising inflation alongside economic stagnation or contraction.
“Several participants also noted that their contacts were already reporting increases in costs, possibly in anticipation of rising tariffs, or that their contacts had indicated willingness to pass on to consumers higher input costs that would arise from potential tariff increases,” the minutes read.
Although Fed Chair Jerome Powell stated in his press conference that the Fed might sustain restrictive policy longer if inflation stays high or loosen it if the labor market weakens, some cautioned that this balancing act could prove more complex.
“Some participants observed, however, that the committee may face difficult tradeoffs if inflation proved to be more persistent while the outlook for growth and employment weakened. Several participants emphasized that elevated inflation could prove to be more persistent than expected,” according to the minutes.
At that meeting, FOMC members decided to decelerate the balance sheet runoff, though the vote wasn’t unanimous. “Several participants did not see a compelling case for slowing the pace of runoff at this meeting,” the summary of the meeting said.
In its March 19 statement, the Fed highlighted that Governor Christopher Waller supported maintaining the existing pace of securities holdings reduction. He joined all other FOMC voting members in agreeing to keep the federal funds rate target range steady.