Points | FOMC Minutes (March 2025)
- Edward von der Schmidt
- May 4
- 11 min read
Next to the Federal Reserve Chair's press conference, the FOMC minutes that follow three weeks after the meeting are the best and most detailed insight you will get into the Fed's deliberations until transcripts are released in five years. Returning to the March 18-19 minutes (published April 9), the discussions emphasized elevated uncertainty and outlook risks on account of policy unknowns. Nevertheless, Fed staff and officials were aware of growth concerns complementing higher anticipated inflation even as the economic backdrop appeared solid at the time of the meeting. As the Committee statement and Chair highlighted, the FOMC planned to remain on hold and await further clarity on the scope, magnitude, and impact of the administration's policy initiatives. The Fed will need assurance that they can look through inflationary tariff effects before initiating an easing pivot.
4 MAY 2025
EDWARD VON DER SCHMIDT
| Sources
Key Takeaways
The Federal Reserve will modify its characterization of full employment in the consensus statement that guides its policy decisions. Instead of making up for labor-market shortfalls, the employment language will assume a more balanced stance vis-a-vis price stability goals.
Financial market conditions between January and March reflected increased outlook risks and uncertainty more than changes in base forecasts at the time.
The decision to slow balance sheet run-off was framed as insurance against an unacceptable drop in reserves following a debt ceiling resolution as well as a step consistent with planned risk management and surveyed market expectations. There was no signaling intent for monetary policy.
Though inflation and longer-run expectations had remained steady alongside a "solid" and "stabilized" labor market, what appeared to be a "solid pace" for real GDP growth at the time of the FOMC meeting had already softened by the release of the minutes, largely on account of elevated trade uncertainty.
Financial conditions remained resilient but masked dichotomies in business size and creditworthiness.
Softer spending weighed on GDP projections, but the staff expected labor markets to remain near full employment and for inflation to accelerate near-term but return to target by 2027. Nevertheless, downside risks to economic activity and employment and upside risks to inflation augured conflicting mandate goals.
The FOMC participant discussion reflected heightened outlook uncertainty along with a consensus on risks to economic activity (lower), employment (lower), and inflation (higher). The scope of tariff dynamics and persistence of tariff effects dominated inflation considerations while the duration and impact of attendant uncertainty and decision-freeze bore implications for growth and employment. Higher goods inflation and weaker consumer demand were flagged. Participants universally saw a need for further clarity in order to inform their view of the appropriate policy path.
Review of Monetary Policy Strategy, Tools, and Communications
The Federal Reserve's five-year strategic review continued "with a focus on labor market dynamics and the FOMC's maximum employment goal." The staff briefed the FOMC on maximum employment, labor market indicators, analysis of shortfalls, and the interaction between the Fed's dual mandate goals.
"Core labor market indicators" included: i) the unemployment rate; ii) job vacancies; iii) the employment-to-population (EPOP) ratio; and iv) the labor force participation rate (LFPR).
The FOMC "generally supported the current description of maximum employment in the Statement on Longer-Run Goals and Monetary Policy Strategy" (aka the consensus statement), namely that maximum employment is "not directly measurable and changes over time owing largely to nonmonetary factors that affect the structure and dynamics of the labor market." Essentially, full employment requires a more holistic view and does not lend itself to a fixed target in the way that inflation does.
However, the characterization of maximum employment as "a broad-based and inclusive goal" came up for consideration, and the FOMC "thought it would be appropriate to reconsider the shortfalls language." The latter is likely to be omitted in the next consensus statement as the FOMC seeks to incorporate greater policy flexibility by not over-committing to its employment mandate at the expense of price stability.
Developments in Financial Markets and Open Market Operations
Between January and March, "Treasury yields declined, equity prices fell, credit spreads widened, and the dollar depreciated. These moves appeared to reflect increased perceived risks - rather than a base case - of a significant deterioration in the U.S. outlook".
The minutes differentiated between the average Fed Funds path implied by futures (lower) and the modal Fed Funds path implied by options and survey responses (little changed). Futures prices may have implied more Fed easing, but the status quo was still the most likely outcome.
Despite near-term increases, longer-run inflation expectations appeared to remain well-anchored.
Equity weakness was attributed to both "trade-related news" and "risk-management considerations" (i.e., de-grossing).
In contrast with foreign asset and currency outperformance, market participants characterized macro price action "as consistent with some re-allocation away from trades that had been based on expectations for continued U.S. economic outperformance relative to global peers." Put differently, American exceptionalism came into question.
The repurchase agreement (repo) market continued to normalize, but the manager "noted that, in the past, a tightening of the repo market had been a precursor to tighter reserve conditions."
A debt ceiling resolution and subsequent rebuilding of the Treasury General Account (TGA) might also drop reserves below desirable levels without much warning, for which "either pausing or sufficiently slowing [balance sheet] runoff would provide meaningful insurance". Slowing runoff was also consistent with FOMC plans to manage tightening repo markets and a depleted overnight reverse repurchase facility (ON RRP) as well as surveyed market expectations.
Staff Review of the Economic Situation
In multiple instances, the minutes qualified the "solid pace" of GDP growth based on the "information available at the time of the meeting" (or similar language). This is a tacit acknowledgment that circumstances had changed by the time the minutes were published three weeks after the FOMC convened. The implication is that growth no longer appeared solid by early April.
Inflation was unchanged (12m PCE: 2.5%; core PCE: 2.8%).
Conditions in the labor market "remained solid and had stabilized".
The contrast between hard data and consumer and business sentiment was evident.
Manufacturing momentum abroad had weakened.
With inflation mostly near target, foreign central banks had eased policy. They "increasingly not[ed] that elevated uncertainty about trade policies was clouding their economic outlooks."
Staff Review of the Financial Situation
The implied policy rate path "over the next few meetings edged higher but moved down at horizons beyond September" due to concerns about "higher near-term inflation and downside risks to economic growth." This implies that the Fed interpreted markets as anticipating that easing would be more likely to come in the Fall (or later) than in May, June, or July. This would suggest that a near-term holding pattern would not have been viewed as inconsistent with market expectations in March.
Various financial market indicators largely pointed to heightened uncertainty and growth outlook concerns.
Reduced borrowing costs for households, businesses, and municipalities masked wider credit spreads and comparatively tighter financial conditions for small businesses. Delinquency rates generally declined but remained elevated.
Staff Economic Outlook
GDP projections were weaker than in January due to aggregate spending below expectations and less supportive financial conditions.
While expected to tick higher, unemployment was projected to remain close to staff estimates of its natural rate - i.e. near full employment.
While placeholder assumptions about potential policies were not changed [Note: Fed officials have distilled trade into one-time, low-tariff vs. dynamic, high-tariff regimes] the staff "continued to note elevated uncertainty regarding the scope, timing, and potential economic effects of possible changes to trade, immigration, fiscal, and regulatory policies." As such, they prepared "a number of alternative scenarios."
Inflation projections were higher in March than in January for 2025, mostly on account of trade assumptions. Still, the staff anticipated that inflation would return to target (2%) by 2027.
"risks around the baseline projections for economic activity and employment had tilted to the downside", while "risks around the baseline projection for inflation were still seen as skewed to the upside".
Participants' Views on Current Conditions and the Economic Outlook
The FOMC participant discussion is worth reading verbatim. Here, observations are loosely organized by the prevalence of views, which do not differentiate between voters and non-voters. Note that prevalence is not necessarily representative of a given view's influence, especially if held by the Chair. Nevertheless, the more widely a view is shared the more likely it is to represent an established consensus and guide policy.
Participants...
"observed that available data pointed to an economy that continued to grow at a solid pace and labor market conditions that remained broadly balanced, but that inflation stayed somewhat elevated."
"noted that inflation had eased significantly over the past two years but remained somewhat elevated relative to the Committee's 2 percent longer-run goal."
"judged that inflation was likely to be boosted this year by the effects of higher tariffs, although significant uncertainty surrounded the magnitude and persistence of such effects."
"commented on a range of factors that could influence the persistence of tariff effects, including the extent to which tariffs are imposed on intermediate goods and thus affect input costs at various stages of production, the extent to which complex supply chains need to be restructured, the actions of trading partners in responding with retaliatory increases in tariffs, and the stability of longer-term inflation expectations."
"judged that labor market conditions remained broadly in balance."
"observed that the available data suggested that the economy had continued to grow at a solid pace but that there were some indications that consumer spending growth might be moderating from its rapid pace over the previous two quarters."
"commented on a number of factors that could restrain consumption, including weaker consumer sentiment and deteriorations in expected household financial situations, as indicated by a number of household surveys, and anticipation that the robust labor income growth and significant increases in asset prices over the previous several years might not continue."
"noted that inflation remained somewhat elevated."
"also observed that recent indicators suggested that economic activity had continued to expand at a solid pace, that the unemployment rate had stabilized at a low level, and that labor market conditions had remained solid in recent months."
"remarked that uncertainty about the net effect of an array of government policies on the economic outlook was high, making it appropriate to take a cautious approach."
"[With economic growth and the labor market still solid and current monetary policy restrictive...] assessed that the Committee was well positioned to wait for more clarity on the outlook for inflation and economic activity."
"noted that policy decisions were not on a preset course and would be informed by the evolution of the economy, the economic outlook, and the balance of risks."
"assessed that uncertainty around the economic outlook had increased"
"remarked that monetary policy was well positioned to address future developments; a restrictive policy could be maintained for longer if inflation were to remain elevated, and policy could be eased if labor market conditions were to deteriorate or economic activity were to weaken."
"assessed that balance sheet reduction had gone well thus far."
Participants generally...
"noted the high degree of uncertainty facing the economy."
"saw increased downside risks to employment and economic growth and upside risks to inflation while indicating that high uncertainty surrounded their economic outlooks."
"noted that most measures of longer-term expected inflation remained well anchored, a factor likely to put downward pressure on inflation."
All participants...
"[in this context, and amid elevated uncertainty around the economic outlook, ...] viewed it as appropriate to maintain the target range for the federal funds rate at 4 1/4 to 4 1/2 percent."
"judged it appropriate to continue the process of reducing the Federal Reserve's securities holdings."
Almost all participants...
"pointed out that many market- or survey-based measures of near-term expected inflation had increased recently."
"view[ed] risks to inflation as tilted to the upside and risks to employment as tilted to the downside."
"supported a slowing of the pace of runoff at this meeting."
Most participants...
"noted that these [inflation] increases might reflect the effects of the anticipation of higher tariffs."
"commented that contacts or surveys reported increased uncertainty about potential changes in federal government policies and a deterioration in business sentiment, which had led many firms to pause their capital spending plans."
"noted the importance of clearly communicating that slowing the runoff pace had no implications for the stance of monetary policy, would not affect the long-term path of the balance sheet, was a natural progression of the slowing decided at the May 2024 meeting, and was in line with the Committee's principles and plans for balance sheet reduction announced in 2022."
A majority of participants...
"commented that the recent cuts in federal government jobs and to federal funding had begun to affect employment at federal contractors, universities, hospitals, municipalities, and nonprofit organizations"
"[emphasizing that uncertainty] noted the potential for inflationary effects arising from various factors to be more persistent than they projected."
Various participants...
"commented that high uncertainty had the potential to damp consumer spending as well as business hiring and investment activities or that inflation was likely to be boosted by increased tariffs."
Many participants...
"noted that their contacts and business survey respondents reported pausing hiring decisions because of elevated policy uncertainty."
"expressed interest in continued discussion of technical aspects of balance sheet policy and tools after the framework review is completed."
Several participants...
"noted that the announced or planned tariff increases were larger and broader than many their business contacts had expected."
"also noted that their contacts were already reporting increases in costs"
"emphasized that ensuring that longer-term inflation expectations remained anchored would enhance the Committee's ability to achieve its price-stability goal."
"highlighted recent increases in businesses' layoff announcements and in people working part time for economic reasons."
"relayed reports from contacts who were concerned that restrictive immigration policies would reduce labor supply and put upward pressure on wages in certain sectors."
"commented that the mixed retail sales data in January and February were consistent with consumption continuing to grow at a positive yet slower pace."
"noted that the recent downgrade in earnings forecasts from retailers and airline companies pointed to weaker consumer demand from both lower- and high-income households."
"highlighted that the auto industry faced significant risks associated with tariffs because of its interconnected and cross-border supply chains."
"noted that their contacts expressed optimism about future firm profitability driven by more business-friendly regulatory or fiscal policy changes or expected productivity gains from artificial intelligence and related technologies."
"emphasized that elevated inflation could prove to be more persistent than expected."
"did not see a compelling case for slowing the pace of runoff at this meeting."
"observed that the Federal Reserve's traditional tool of open market operations could also be used should signs of reserve scarcity unexpectedly emerge."
A number of participants...
"commented that the Committee's existing tools could also be used to help address potential disruptions to the market for reserves."
Some participants...
"observed that inflation data over the first two months of this year were higher than they had expected."
"highlighted that core goods inflation had increased"
"noted that financial conditions had tightened since the January meeting, reflecting lower equity prices and higher risk spreads on corporate bonds, but most of them commented that risk premiums in bond and equity markets remained low by historical standards or that businesses and consumers with higher credit scores continued to be able to obtain financing."
"observed, however, that the Committee may face difficult tradeoffs if inflation proved to be more persistent while the outlook for growth and employment weakened."
"noted that a slower pace of runoff would also help guard against reserve scarcity emerging with little advance notice during a period of potentially rapid increase in the TGA."
"highlighted the importance of the Federal Reserve's ceiling tools and encouraged the ongoing efforts of the Desk to improve the efficacy of the standing repo facility."
A few participants...
"noted that consumption spending could continue to be supported by solid growth in real personal disposable income or by a rebound in equity prices."
"highlighted the strains faced by the agricultural sector, as tariffs threatened to further compress its profit margins by lowering farm export prices and raising input costs."
"cautioned that an abrupt repricing of risk in financial markets could exacerbate the effects of any negative shocks to the economy."
A couple of participants...
"highlighted factors that might limit the inflationary impact of tariffs"
"noted that the continued balance in the labor market suggested that labor market conditions were unlikely to be a source of inflationary pressure."
"noted that, in the period ahead, it could be especially difficult to distinguish between relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of tariffs."
Sources
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