Meeting notes show Fed fears could face difficult trade-offs

Fed officials were concerned at their meeting earlier this month that tariffs could fuel inflation and put interest rate policy in jeopardy, according to meeting notes released Wednesday.

The summary of the FOMC's May 6-7 meeting reflected continued concerns about the direction of fiscal and trade policy, with officials ultimately deciding that the best course of action was to keep interest rates stable.

"Participants agreed that uncertainty about the economic outlook had increased further and that caution was appropriate until the net economic impact of a range of changes in government policy became clearer," the meeting notes. "Participants noted that the FOMC could face difficult trade-offs if inflation proved more persistent and the outlook for growth and employment was weaker."

While policymakers expressed concerns about the direction of inflation and the vagaries of trade policy, they said growth was "solid" and the labour market was "generally balanced", although the risk of a weaker labour market was growing and consumers were continuing to spend.

As it has done since the last rate cut in December, the FOMC has maintained its target range for the benchmark federal funds rate at 4.25% to 4.5%.

"In considering the monetary policy outlook, participants agreed that the FOMC was prepared to wait for a clearer outlook for inflation and economic activity as growth and labour markets remained solid and monetary policy was moderately constrained," the meeting notes said.

"Uncertainty about the economic outlook has increased further," the statement said. In addition, the FOMC said that achieving the twin objectives of full employment and low inflation had been complicated by policy uncertainty.

Since the meeting, officials have repeatedly said they would wait until there is more clarity on fiscal and trade policy before considering another rate cut. Market expectations have responded in kind, with futures traders now forecasting little chance of a rate cut before the Fed's September meeting.

Trade policy has also changed since the last meeting of the Federal Reserve.

That, in turn, helped spark a rally on Wall Street, and while bond yields continued to climb, that's something President Trump is trying to contain.

Mr. Trump has pressured central bankers to lower interest rates amid signs that inflation is creeping closer to the Fed's 2 per cent target and the trade war. However, Fed Chairperson Jerome Powell has said the central bank will not be affected by political interference.

The meeting also discussed the Federal Reserve's five-year policy framework.

When officials last looked at their long-term policies, they designed what came to be known as "flexible average inflation targeting," essentially insisting that officials could allow inflation to run above their 2 per cent target for a period of time to promote more inclusive labour market growth.

The meeting notes that the Fed wants to develop "sound policies that apply to a variety of economic circumstances", and officials said they had no intention of changing their inflation target.