FOMC Minutes Highlight Tensions Between Neutral Policy and Inflation Fears — Evening Brief – 08.20.25
The FOMC minutes from the July 29-30 meeting suggest a committee wrestling with conflicting signals—acknowledging that interest rates may no longer be restrictive, while remaining deeply concerned about the risks posed by tariffs, inflation expectations, and elevated asset valuations.
Several officials noted that the current federal funds rate “may not be far above its neutral level,” citing supportive financial conditions that could continue to fuel economic activity.
Despite the neutral-rate acknowledgment, members voiced strong concern over inflation. Several participants flagged the risk of inflation expectations becoming unanchored, noting that inflation has run above 2% for an extended period (Though surveys like UMich have shown fluctuations, market-based measures of expectations remain stable). Officials stressed that tariff-driven cost pressures could exacerbate this risk if persistent.
The minutes revealed uncertainty around the timing and persistence of tariff impacts. Many expected delays in price effects due to inventory stockpiling, contractual lags, and firms’ reluctance to disrupt customer relationships. Several participants anticipated that businesses would eventually pass tariff costs to consumers. A few noted that evidence so far suggested foreign exporters bore little of the tariff burden, with U.S. businesses and households shouldering most costs.
Participants emphasized risks to both sides of the dual mandate. Most judged inflation risk as the greater concern, outweighing downside employment risks—a view that came before recent payroll revisions revealed a weaker labor market backdrop.
The Fed staff assessed financial vulnerabilities as “notable,” citing elevated equity valuations, compressed credit spreads, and still-high housing prices. Several officials highlighted concerns that these stretched valuations could amplify financial instability if conditions deteriorate. While not the main policy driver, these concerns raise the bar for rapid easing. The fear: cutting too soon could fuel further froth in risk assets, undermining financial stability.
Some participants stressed that the inflationary impact of tariffs depends heavily on the Fed’s policy stance. Others pointed out that economic activity remains supported by strong household balance sheets, elevated net worth, and low consumer delinquencies, suggesting continued underlying resilience.
The minutes portray a Fed caught between signaling rates near neutral and warning of inflation risks. While tariffs and valuation pressures dominate the narrative, the tension between growth resilience and inflation fears suggests policymakers remain reluctant to pivot toward easing—even as cracks emerge in the labor market.