How concerned Federal Reserve officials were over stagflation risks as they met last month may become more clear on Wednesday in a readout of a gathering held before President Donald Trump's April 2 tariff announcement shook markets and made forecasts for higher inflation and slower growth more widespread.
U.S. central bank policymakers acknowledged at their March 18-19 meeting that the outlook had shifted from confidence in slowing inflation and continued growth to a near-universal sense of uncertainty and concern that new U.S. import taxes would raise inflation even as they curbed demand, growth, and perhaps employment.
"Uncertainty around the economic outlook has increased," the Fed said in an updated policy statement on March 19 that also dropped a prior reference to the risks facing the economy as "roughly in balance" to say that it was "attentive to the risks to both sides of its dual mandate."
That statement, though, was rooted in initial trade announcements and other actions Trump had taken to that point since his return to the White House on January 20. Updated policymaker forecasts released at that meeting showed officials were already anticipating slightly slower growth and a bit higher inflation than previously projected, but on balance they still expected to cut interest rates by half a percentage point by the end of 2025.
Then two weeks later Trump unveiled new levies on dozens of nations that were far more aggressive than expected, raising the average tariff on goods from abroad from an estimated 2.5% to 25% or more and unleashing a ferocious selloff in global equity markets.
Markets since then have run with the ball, and investors now see the Fed cutting rates by a full percentage point this year.
While the minutes being released on Wednesday may understate the level of concern among policymakers that has taken hold since April 2, they often provide significant details about staff forecasts and the different scenarios under consideration. They can also describe the weight and intensity of opinion around different aspects of the economic outlook.
The last meeting "put down a marker for a starting point on which forecast changes from Trump reforms can build," analysts from the consulting firm of former Fed Governor Larry Meyer wrote.
From there, they said, monetary policy may shift "very slowly then all at once" as it becomes clear whether the overall impact of the tariffs and other Trump policy changes push the economy towards higher prices, slower growth, or some of each.
SIGNAL AND NOISE
The last outcome is the most difficult for the Fed to address, requiring close scrutiny of other things like movements in hard-to-measure inflation expectations and assessing which of its two goals of stable inflation and low unemployment need more immediate attention.
At an appearance before a business journalism conference last week, Fed Chair Jerome Powell said that scenario may be just what the central bank is facing given that Trump's tariffs were "significantly larger than expected."
"The same is likely to be true of the economic effects, which will include higher inflation and slower growth," Powell said, though he did not feel the Fed's two congressionally mandated goals were yet in conflict.
The unemployment rate in March was 4.2%, a slight rise from the prior month, but firms added more than 200,000 jobs with the jobless rate pushed higher largely by the addition of new workers to the labor force. The Personal Consumption Expenditures Price Index, the Fed's key inflation gauge, increased 2.5% over the prior 12 months in February, just half a percentage point above the central bank's target.
Inflation has, however, shown little progress since about September, and the tariff impact is now on the horizon - and perhaps even beginning to roll through the economy given reports of accelerated demand for autos, imported wine, and other goods about to be taxed.
The challenge for the Fed will now be teasing a broad macroeconomic signal from a likely noisy period. Some key prices like gasoline may fall on expectations of weaker demand, while other prices for many imports may climb from the levies, and - on top of it all - the vicious stock market swoon could dent household spending over time.
"Falling oil and gas prices, as well as a 30% decline in shipping costs since February, will offset about a quarter of the after-tax impact of tariffs on household income," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote on Tuesday. But the drop in equity prices translates into market losses of $5.5 trillion among U.S. households since the end of last year, with perhaps a $140 billion blow to spending to follow.
"On balance, then, the outlook is finely balanced between stagnation and recession," he said.
