Federal Reserve Warns of Prolonged Inflation Risks Amid Trade Uncertainty

Federal Reserve officials expressed growing concerns that inflation may persist longer than initially anticipated, according to minutes from the May policy meeting. The central bank kept its benchmark federal funds rate unchanged for the third straight meeting, maintaining the range of 4.25% to 4.5%. However, policymakers acknowledged the possibility of keeping rates higher for longer due to inflation worries.
The minutes highlighted increased risks of rising inflation and unemployment, fueled by trade-related uncertainties. Federal Reserve staff economists revised down their growth projections for 2025 and 2026, citing the drag from announced trade policies. These measures are expected to slow productivity growth and reduce potential GDP. A recession is also viewed as a plausible outcome.
Tariffs were noted as a significant driver of inflation, with projections indicating a marked increase in 2025, followed by a smaller rise in 2026. Inflation is expected to decline to the Fed’s 2% target by 2027. The minutes emphasized heightened uncertainty surrounding trade policy and its impact on the economy.
Consumer spending has shown signs of slowing, with retail sales growth weakening and real consumer spending decelerating. Despite these trends, the Fed remains focused on curbing inflation, with Chair Jerome Powell signaling a potential shift to an era of higher interest rates.
Economic observers caution that the current calm in inflation could be short-lived, with early indicators pointing to renewed threats. The Fed’s cautious stance reflects its commitment to maintaining price stability, even as it navigates the risks of slower growth and potential recession.

Published: 5/30/2025