The Fed Forecasts Stagflation -- WSJ

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Dow Jones NewsMay 28, 7:40 PM UTC
DJ The Fed Forecasts Stagflation -- WSJ

By Nick Timiraos

 

Federal Reserve officials signaled concern at their meeting earlier this month that large tariff hikes would push up prices and could risk stoking higher inflation.

 

Policymakers largely agreed that heightened economic uncertainty and increased risks of both higher unemployment and inflation warranted no change in their wait-and-see policy stance, according to minutes of the May 6-7 meeting released Wednesday.

 

"Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer," said the minutes.

 

Between officials' most recent meetings in mid-March and early May, President Trump ratcheted up tariffs on most U.S. trading partners before suspending some of the most aggressive hikes. The minutes released Wednesday provided a written account of how officials were digesting those initial moves.

 

Expectations of a rate cut at the Fed's next meeting in mid-June declined after Fed Chair Jerome Powell said at a news conference after the last meeting that the costs of waiting to learn more about the economy were "fairly low." In public comments since the meeting, Fed officials have roundly endorsed that view, implying a high bar for the Fed to cut interest rates.

 

Since officials last met, Trump agreed to lower tariffs on China to 30% from 145%. The detente with Beijing has calmed nervous investors who feared the U.S. economy might slow down rapidly and force the Fed to consider cutting rates to shore up a flagging labor market.

 

Investors in interest-rate futures markets expect the Fed will hold rates steady through the summer.

 

The Fed lowered its benchmark rate by a percentage point last year, to around 4.3%, after inflation declined and the unemployment rate crept up. The central bank had raised rates to a two-decade high in 2022 and 2023 to combat inflation.

 

Trump last month backed off an implied threat to sack Powell, but he has continued hectoring the central bank leader to reduce rates.

 

The minutes strongly suggest the Fed isn't close to lowering rates anytime soon. Instead, the meeting summary, released with the customary three-week delay, highlighted fears over a recipe for stagflation, where economic activity slows while price increases accelerate.

 

Trade-policy announcements prompted the Fed's staff economists to revise lower their expectations for economic growth this year and next year compared with a forecast prepared for the March meeting. As a result, the labor market was projected to "weaken substantially" over the rest of the year, leading the unemployment rate to rise and remain elevated through 2027.

 

Tariffs, meanwhile, were expected to "boost inflation markedly this year and to provide a smaller boost in 2026," the minutes said. Even after substantially revising their inflation forecast for 2025, officials thought that if their forecast turns out to be wrong, it would be because inflation was even higher in 2026 or 2027.

 

The minutes suggested that officials were particularly focused on the risks of higher inflation. The minutes said almost all policymakers in attendance flagged the risk that inflation could be more persistent than expected, the minutes said.

 

Many officials said business contacts or survey responses suggested firms "were planning to either partially or fully pass on tariff-related cost increases to consumers," the minutes said. Some expressed concern that tariffs on intermediate goods, such as steel or aluminum, could put additional pressure on inflation.

 

Several policymakers said they were hearing from businesses who weren't subject to tariffs who might nevertheless opportunistically raise their prices if competitors did so as well.

 

Those types of observations could alarm Fed officials because the economy has recently been through a period of high inflation. Many economists believe consumers' and businesses' expectations of future inflation play an important role in deciding how much prices actually go up.

 

Some policymakers highlighted factors that could help slow the magnitude or persistence of any inflationary impulse from tariffs, including more resistance to higher prices from households, a weakening of the economy or reductions in tariffs as negotiations with trade partners bear fruit.

 

Write to Nick Timiraos at [e-mail]

(END) Dow Jones Newswires

 

May 28, 2025 15:40 ET (19:40 GMT)

 
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