Key takeaways from the FOMC Minutes for the May 2025 meeting:

• Economic Activity: Despite a small decline in Q1 GDP (likely due to measurement issues from import surges ahead of tariffs), underlying momentum (PDFP) remained solid. Labor markets stayed strong, with low unemployment and stable job gains.
• Inflation: Headline PCE inflation was 2.3% YoY (March); core was 2.6%. Inflation has eased since 2022 but remains "somewhat elevated." Tariffs are expected to add upward pressure to inflation, especially in 2025.
• Tariffs and Uncertainty: Participants flagged the larger-than-expected scope and scale of recent tariff increases, which were seen as raising upside inflation risk and downside growth risk. Business sentiment deteriorated, with some firms pausing investment.
• Inflation Strategy Review:
  • Participants reaffirmed the 2% inflation target and discussed shifting away from flexible average inflation targeting toward flexible inflation targeting—viewed as more robust in today's environment.
• Market Expectations:
  • Markets are pricing in 2–3 rate cuts by year-end, though participants gave no firm guidance.
  • The Committee emphasized a "wait and see" approach given heightened uncertainty, especially around trade and fiscal policy.

Key notes on the Fed’s discussion of its policy stance and outlook:

• Policy Stance: The Fed is in a holding pattern, awaiting clearer signals on inflation and economic activity.
• Outlook for Rates:
  • Policymakers see elevated risks of both higher inflation (due to tariffs) and higher unemployment (due to trade and business uncertainty).
  • Most participants view persistent inflation as a key risk; some worry inflation expectations may drift upward.
  • The FOMC will base future moves on incoming data, particularly around inflation, labor markets, and the net effects of government policy changes.