Fed officials warned of rising recession risks as inflation remains high

Federal Reserve officials warned during their May 6–7 meeting that the US economy is now facing a real risk of tipping into recession, as inflation remains sticky and early cracks are beginning to show in the labor market, according to meeting minutes released Wednesday by the Federal Open Market Committee.

While the central bank voted to hold interest rates steady between 4.25% and 4.5%, their internal conversations showed deep concerns about growing uncertainty and the conflict between inflation control and employment goals.

The discussion showed that policymakers are especially anxious about the impact of trade policy changes, with new tariffs and ongoing tension between Washington and Beijing adding fuel to the inflation fire.

The Fed admitted in the minutes that the effects of these government decisions are not yet fully clear, and for now, the only move they agree on is to wait and observe. The minutes said:

“Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.”

Some members also warned of “difficult tradeoffs” ahead if inflation stays high while economic growth slows down and unemployment begins to rise.

Fed holds its line as Trump leans in on rate pressure

Even as the Fed chose to keep rates on hold, officials described the economy as “solid” and said the labor market is “broadly in balance.” But that doesn’t mean they’re comfortable. They acknowledged that the risks are growing on both ends—inflation is not falling fast enough, and jobs data might start slipping. 

The fact that consumers are still spending has kept some stability in place, but the tone of the meeting leaned cautious, not confident.

The Fed said its current rate stance remains “moderately restrictive” and agreed there’s no urgency to act until things become clearer. But it’s also clear they’re struggling to balance their two main mandates—low inflation and maximum employment. 

The post-meeting statement confirmed this, noting that rising policy uncertainty has made achieving those goals harder than before. No rate cuts will happen until that fog clears.

That message has already filtered into markets, with futures traders now betting that the Fed will not cut rates until September 2025. The hesitation isn’t just about inflation. The Fed is also factoring in Trump’s trade decisions, which have swung wildly in recent weeks. 

Just days after the Fed met, Trump’s administration walked back some of the most aggressive tariffs on Chinese goods, entering a 90-day negotiation period with Beijing. That news gave a short-term boost to US stocks, but bond yields kept rising—something Trump has reportedly been pressuring the Fed to address.

Still, Fed Chair Jerome Powell has made it clear he won’t bend to the White House. Powell, who’s led the Fed through a politically volatile era, told reporters the Fed would not be influenced by “political interference.” Despite Trump’s repeated calls to slash rates, Powell’s position hasn’t changed.

Inflation strategy comes under new scrutiny

The meeting also reopened debate over the Fed’s five-year policy framework, including its approach to inflation targeting. In 2020, the Fed adopted a strategy called flexible average inflation targeting, which allowed inflation to run above the 2% target temporarily in the hope of encouraging more inclusive labor market gains.

But some officials are now rethinking that plan. The minutes said the framework has “diminished benefits” in a world where inflation shocks are larger and interest rates are no longer pinned at zero, as they were after the 2008 crisis. 

During the pandemic, the Fed kept rates low for too long while inflation climbed, forcing it to rush into aggressive hikes starting in late 2021. That misstep is still fresh in the minds of committee members.

Officials now want a framework that works no matter what kind of economic chaos shows up. The minutes said they are aiming for something “robust to a wide variety of economic environments,” which means a system that won’t fail when surprises hit. They also emphasized that the 2% inflation target is not up for debate, they’re keeping it locked in.

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