FOMC Minutes: Why is the Fed More Worried Than the Markets?
FOMC Minutes: Why is the Fed More Worried Than the Markets?
By:Ilya Spivak
Why is the Fed skeptical as stock markets cheer? FOMC meeting minutes may have the answer.
- The Fed has become more despondent about tariffs amid policy standstill.
- Markets are decidedly cheerier, with US stocks erasing most 2025 losses.
- Minutes from May’s FOMC meeting may shed some light on this disparity.
The Federal Reserve has pointedly excused itself from passing judgement on what the trade war triggered by President Donald Trump will mean for the economy, and thereby for monetary policy. Traders will now be keen to gauge whether policymakers’ views started to tilt toward a clearer bias after April’s tariff-inspired fireworks.
In March, the U.S. central bank threw up its hands as the White House began to announce a flurry of tariff hikes. Fed Chair Jerome Powell explained that tariffs typically boost inflation and depress growth, but there was no knowing how this particular episode will play out. With the jobless rate relatively low and inflation steady, it was time to wait.
US tariff policy has confounded the Federal Reserve
This message was broadly unchanged after the rate-setting Federal Open Market Committee (FOMC) met in early May. Powell’s tone had sharpened at the post-meeting press conference, however. He pointed squarely at the tariffs as threatening to put at odds the Fed’s employment and price stability objectives. He said “stagflation” aloud.
Updated language in the FOMC policy statement signaled that Powell’s feisty display was not a one-man act. Rather, it channeled the mood among officials. It was blunt, saying the committee “judges that the risks of higher unemployment and higher inflation have risen.”
By the time the FOMC gathered for May’s conclave, the bellwether S&P 500 stock index had already rallied as much as 18.5% from the panic lows set a month earlier. Wall Street had erased over 60% of the selloff from mid-February, triggered by worries about the tariffs’ economic consequences and culminating in early April’s “Liberation Day” panic.
May FOMC meeting minutes: what’s the Fed really afraid of?
Policymakers’ sour mood seems to have been clearly at odds with this exuberance in financial markets. With the release of minutes from May’s meeting, traders will want to see whether there’s more to this than the typical timeline mismatch between the markets’ more volatile reaction function and the central bank’s longer-view approach.
As it stands, the markets are pricing in 95 basis points (bps) in rate cuts between now and the end of next year. 44bps are priced into benchmark Fed Funds futures for 2025 and 52bps for 2026. This broadly lines up with the Fed’s guesstimate of 50bps apiece. The first cut this year has been pushed back to September.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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