The minutes from the Federal Reserve’s May meeting highlight growing fears of stagflation—a troubling mix of stagnant economic growth and persistent inflation—due to recent White House trade strategies and a bleaker forecast for the job market over the next few years.
The Fed’s economic outlook took shape while President Donald Trump was in the middle of implementing a wave of new tariffs. These discussions happened just before the U.S. and China reached a temporary trade truce earlier this month that paused the mutual imposition of steep tariffs.
Despite the easing of immediate tensions with China, the Federal Reserve’s pessimistic economic forecast is expected to influence its next formal summary of economic projections. This comes as the White House continues to pursue a range of new bilateral trade agreements that are likely to shape future policy dynamics and economic performance.
Federal Reserve officials expressed concern about the strength of the labor market, which they anticipate will deteriorate considerably in the near future. As stated in the minutes, “The labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff’s estimate of its natural rate by the end of this year and remaining above the natural rate through 2027.”
This outlook marks a shift from earlier projections. In March, the Federal Reserve anticipated an unemployment rate of 4.4 percent for 2025 and 4.3 percent for both 2026 and 2027. However, the May minutes suggest that these numbers are now expected to climb higher, signaling deeper concerns about employment trends.
Additionally, the Fed’s latest assessment included raised expectations for inflation and lowered predictions for economic growth compared to the March Summary of Economic Projections (SEP). Officials now expect inflation to reach an annual rate of 2.7 percent for this year, while GDP growth is forecast at only 1.7 percent.
Recent economic data supports these revised expectations. Reports from the Labor and Commerce Departments show both inflation and GDP growth have been softening. Specifically, the personal consumption expenditures (PCE) price index, a key inflation measure closely watched by the Fed, recorded a 2.3 percent annual increase in March—down from 2.7 percent in February. Similarly, the consumer price index (CPI) stands at 2.3 percent, down from its recent January peak of 3 percent.
On the growth side, the economy took a significant hit in the first quarter of the year. Businesses increased their imports in anticipation of incoming tariffs, but the result was a sharp downturn in GDP. According to the Commerce Department’s advance estimate, GDP shrank by 0.3 percent in the first quarter after growing by 2.4 percent in the last quarter of the previous year.
The Federal Reserve’s internal discussions suggest that this economic slowdown could be prolonged, driven in part by the impact of ongoing tariff policies. The minutes state, “Trade policies were also expected to lead to slower productivity growth and therefore to reduce potential GDP growth over the next few years.”
This anticipated decline in productivity and output has added to the Fed’s cautious stance on interest rates. While the Fed made three rate cuts in the latter half of last year, it has since held interest rates steady since January. The current range remains at 4.25 percent to 4.5 percent, as the Fed waits for more clarity on how trade policy and broader economic uncertainties will evolve.
At the same time, some policymakers believe that softening employment could actually help to ease inflationary pressures. According to the minutes, several officials remarked that inflation might ease if the labor market begins to falter or if economic activity slows down more broadly. As noted by EY economist Gregory Daco in a commentary, “Some [officials] noted that heightened uncertainty could curb demand, and that inflation pressures may ease if downside risks to activity, or the labor market materialize.”
Taken together, the Fed’s latest internal discussions point to a fragile and uncertain economic outlook. While inflation remains a concern, the greater worry appears to be the threat of an extended period of weak growth coupled with a struggling job market. The role of the White House’s trade policies continues to loom large in this scenario, with Fed officials warning that the resulting decline in productivity could further restrain the economy’s potential.
With the unemployment rate now expected to rise above the natural rate and stay elevated through at least 2027, the implications for workers and businesses could be significant. The Fed’s long-term forecast suggests that the economy may not return to pre-tariff levels of employment strength or productivity any time soon.
Meanwhile, inflation forecasts, although still elevated, are showing early signs of moderation. If that trend continues, it could relieve some pressure on consumers, even as growth remains sluggish.
The Federal Reserve faces a delicate balancing act: managing inflation without pushing the economy into a deeper slump, all while navigating the ripple effects of an aggressive trade agenda. The decisions made in the coming months—on interest rates, trade, and fiscal strategy—will likely determine whether the U.S. can steer clear of a full-blown stagflation scenario or be pulled deeper into economic stagnation.
As the Fed continues to monitor the fallout from tariffs and trade tensions, the stakes remain high for policymakers, investors, and workers alike. The central bank’s next set of projections will be closely watched for signs of how it plans to respond to the evolving economic landscape, which remains precarious and highly dependent on future trade developments and labor market trends.
