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Minutes from the Federal Open Market Committee (FOMC) meeting on May 6-7, 2025, show that Federal Reserve staff have significantly increased their assessment of recession risk for the U.S. economy. This heightened concern is primarily attributed to the potential effects of recently announced tariffs.
Here’s a breakdown of the key points from the minutes:
* Tariffs as a Key Concern: Fed staff projected that new trade policies, particularly the imposition of tariffs on U.S.-China trade, would sharply boost inflation in 2025 and weigh on productivity and economic growth. Officials noted that many businesses were already planning to pass higher costs on to consumers, and some firms not directly impacted by tariffs might follow suit.
* “Difficult Tradeoffs” for the Fed: Participants in the meeting expressed concern that the Committee might face “difficult tradeoffs” if inflation proves to be more persistent while the outlooks for growth and employment weaken. This presents a dilemma for the Fed’s dual mandate of stable prices and maximum employment.
* Recession Probability Increased: The projections prepared by Fed staff indicated that the possibility of the economy entering a recession was “almost as likely as the baseline forecast.” This is a significant shift in their assessment of economic downside risks.
* Weakening Labor Market Forecast: The staff also forecasted that the labor market would weaken “substantially,” with the unemployment rate expected to rise markedly by the end of the year and remain elevated through 2027.
* Elevated Uncertainty: The minutes highlighted that there was “considerable uncertainty surrounding the evolution of trade policy as well as about the scale, scope, timing, and persistence of associated economic effects.” This elevated uncertainty was seen by participants as making a cautious approach to monetary policy appropriate.
* Inflation Persistence: While inflation is forecast to return to 2% by 2027, there’s considerable risk of persistence in the near term, largely due to the tariffs. “Almost all” Fed officials commented on the risk that inflation could prove more persistent than expected.
In essence, the Fed minutes reveal a growing apprehension among policymakers and staff about the potential for tariffs to create a stagflationary environment – characterized by higher inflation alongside weaker growth and rising unemployment. This uncertainty is pushing the Fed towards a more cautious stance on future interest rate decisions, as they grapple with how to respond to a situation where both their inflation and employment goals are under threat.

Video courtesy of Interactive Brokershome

Video courtesy of Interactive Brokers