Fed Sees Elevated Risks Of Higher Inflation, Weakening Growth Amid Trump Tariff Uncertainty

Most Federal Reserve officials believed last month that the U.S. economy was staring at lower economic growth and a rise in inflation amid uncertainty over government policies.

“Participants generally saw increased downside risks to employment and economic growth and upside risks to inflation,” the minutes of the Federal Open Market Committee meeting from March 18-19 said.

Several policymakers noted that it could be difficult to differentiate between “relatively persistent changes in inflation and more temporary changes” that might be associated with the introduction of tariffs.

Fed officials also believed they could face difficult tradeoffs between lowering and maintaining higher for longer rates “if inflation proved to be more persistent while the outlook for growth and employment weakened.”

The U.S. central bank kept its key borrowing unchanged between 4.25% and 4.50% but raised its core inflation expectations for the year by 300 basis points and slashed the growth forecast to 1.7% and 2.1%.

However, this was before President Donald Trump unveiled tariffs on U.S. trading partners, which were seen as much higher than expected.

The high tariff rates raised concerns about a recession and wiped off trillions from the U.S. stock markets.

“While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent,” Federal Reserve Chair Jerome Powell said last week.

On Wednesday, Trump paused tariffs on most countries for 90 days, except China, which was hit by an astonishing 125% levy after Beijing had retaliated against initial reciprocal tariffs.

While Fed officials noted last month that risk premiums in bond and equity markets remained low by historical standards, some raised alarm bells about abrupt repricing.

"A few participants cautioned that an abrupt repricing of risk in financial markets could exacerbate the effects of any negative shock to the economy," according to the minutes.

Additionally, there was a unanimous decision to continue the process of reducing the Federal Reserve's securities holdings.

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