The minutes of the last Fed meeting on May 6 and 7, 2025, show that the trade war under Trump has created significant uncertainty for US monetary policy. Federal Reserve members emphasized the need for a “cautious approach” in light of these uncertainties and are well-positioned to wait for more clarity on economic prospects.
Key Points from the Minutes
- Nearly all participants see the risk that inflation may prove to be more persistent than originally expected.
- There is a difficult trade-off: If inflation remains high for longer while growth and employment weaken, challenging compromises will be necessary.
- The uncertainties from the trade war lead the Fed to manage its interest rate policy carefully and likely do not plan any rate cuts before September.
Market reactions to the minutes were initially very minimal, suggesting that these assessments are already largely priced in. Furthermore, behavior in the stock markets is also influenced by the trade war: the so-called “TACO trade” shows how investors react to Trump’s tariff threats with price drops, looking to buy in at lower prices in anticipation of a suspension or softening of these measures.
Summary
In summary, the trade war under Trump is leading to increased uncertainty regarding inflation trends and economic growth. This prompts the Fed to adopt a cautious monetary policy and a wait-and-see approach toward further rate steps. These uncertainties may also affect future market developments – whether in the bond market through interest rate decisions or in the stock market through speculative reactions to tariff announcements.