Federal Reserve — FOMC Statement (USA, 2025)

FOMC Minutes of the Federal Open Market Committee May 6 7, 2025 F E D E R A L R E S E R V E S Y S T E M Minutes of the Federal Open Market Committee May 6 7, 2025 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, May 6, 2025, at 8:30 a.m. and continued on Wednesday, May 7, 2025, at 9:00 a.m.1 Review of Monetary Policy Strategy, Tools, and Communications Committee participants continued their discussions related to their review of the Federal Reserve s monetary policy framework, with a focus on the price-stability side of the dual mandate and the FOMC s monetary policy strategy. The staff briefed policymakers on lessons drawn from the experiences of the U.S. and other economies with inflation over the past five years and the possible implications for monetary policy. The staff discussed the role of large and persistent demand and supply shifts, the way production capacity constraints amplified supply demand imbalances, and the degree to which labor market tightness contributed to inflation both in the U.S. and abroad. The staff considered the role of stable longer-term inflation expectations in limiting the magnitude and persistence of the post-pandemic inflation surge and facilitating disinflation without significant damage to the labor market. The staff also considered whether medium-term inflation risks have become more balanced around the 2 percent objective than they were during the pre-pandemic period, when the proximity of the policy rate to the effective lower bound (ELB) appeared to contribute to inflation running persistently below 2 percent. They presented model-based analysis of the costs and benefits of different inflation-targeting strategies in conditions of low levels of aggregate demand and inflation as well as in situations in which simultaneously high inflation and unemployment lead to a tradeoff between the Committee s inflation and employment objectives. In their discussions, participants strongly reaffirmed their commitment to the 2 percent longer-run inflation objective and to the importance of longer-term inflation expectations being firmly anchored at that target rate. They emphasized that anchored inflation expectations help the Committee in achieving price stability, thereby enhancing the Committee s ability to promote maximum employment. Some participants also noted that short-term inflation expectations matter for economic decisions and 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 May 6 7, 2025 can affect the persistence of inflation. Participants agreed that a commitment to its explicit 2 percent inflation objective, along with anchored longer-term inflation expectations at that level, enhances the Committee s transparency and accountability and bolsters the effectiveness of monetary policy. Participants discussed the advantages and disadvantages of flexible average inflation targeting, under which monetary policy seeks to make up for persistently below-objective inflation to achieve average inflation of 2 percent, and flexible inflation targeting, under which policy seeks to return inflation to 2 percent without making up for previous deviations from target. Participants generally observed that when the risks of the policy rate hitting the ELB were more prominent and inflation was persistently running below the target, flexible average inflation targeting could have potentially limited the risk of longer-run inflation expectations becoming unanchored to the downside. Participants noted, however, that the strategy of flexible average inflation targeting has diminished benefits in an environment with a substantial risk of large inflationary shocks or when ELB risks are less prominent. Participants indicated that they thought it would be appropriate to reconsider the average inflation--targeting language in the Statement on Longer-Run Goals and Monetary Policy Strategy. Participants noted that an effective monetary policy strategy must be robust to a wide variety of economic environments. They viewed flexible inflation targeting as a more robust policy strategy capable of correcting persistent deviations of inflation from either side of the Committee s 2 percent longer-run objective. Participants also noted that the Committee s strategy should reflect its willingness to make forceful use of all available tools as appropriate should the risks of hitting the ELB again materialize. Developments in Financial Markets and Open Market Operations The manager turned first to a review of financial market developments. Amid significant market volatility over the intermeeting period, longer-maturity Treasury yields rose, broad equity price indexes changed little on net, credit spreads widened, and the dollar depreciated. The manager observed that market participants appeared to interpret recently announced trade policy changes as a negative supply shock that could restrain domestic activity relative to foreign activity in the near term. The manager noted that respondents to the Open Market Desk s Survey of Market Expectations had materially lowered their gross domestic product (GDP) forecasts and raised their inflation forecasts for this year while significantly increasing the probability they placed on a recession occurring within the next six months. The dollar depreciated substantially against most major currencies, as the trade-weighted broad dollar index declined over 2 percent. Market contacts attributed the decline to increased foreign exchange hedging prompted by heightened policy uncertainty and concerns that trade policy could pose greater downside risks to the U.S. than to other economies. The manager noted that the dollar had depreciated even though U.S. interest rates had risen more than foreign interest rates and prices of Minutes of the Federal Open Market Committee 3 risky assets had declined, which historically have been associated with dollar appreciation. Liquidity in foreign exchange markets deteriorated but was roughly in line with the historical relationship between liquidity and measures of market volatility. The Treasury yield curve steepened materially, as short-term Treasury yields declined about 20 basis points over the intermeeting period while longer-term yields increased on net. Measures of Treasury market liquidity deteriorated immediately after the announcement of higher-than-expected tariffs on April 2 and partially recovered later in the period. The deterioration in liquidity, however, was commensurate with the historical relationship between measures of market volatility and liquidity, and the Treasury market continued to function well. The manager noted that an unwinding of positions that had sought to profit on spreads between Treasury yields and interest rate swaps appeared to have been a factor in the deterioration of liquidity and the associated rise in longer-term yields. By contrast, positions held in order to arbitrage the basis between Treasury cash and futures prices had appeared to remain largely stable. Inflation expectations increased modestly at short horizons but remained stable at longer horizons. While equity prices declined sharply early in the period, these movements subsequently retraced, and broad equity indexes were essentially unchanged on net. However, equity prices remained below their peak levels in mid-February, and options prices indicated greater investor demand for protection against further equity price declines. Corporate bond and leveraged loan spreads widened on net. Primary issuance had briefly paused at the height of market volatility but subsequently resumed. Market contacts suggested that, rather than disinvesting away from U.S. assets, global investors had instead sought to increase their hedging against the risk of further dollar depreciation. The manager noted that no evidence indicated that foreign investors had sold material amounts of U.S. assets. Available data pointed to modest outflows from fixed-income securities that were largely offset by inflows into equity securities. The manager, however, observed that large global investors tend to change their investment strategies only slowly and that potential future geographic asset re- allocations will depend on the evolution of the global economic outlook. The modal implied policy path based on options prices, which is a proxy for market baseline policy expectations, moved down some over the period and was consistent with either one or two 25 basis point rate cuts by the end of the year only slightly more than at the time of the March FOMC meeting. The option-implied distribution of rate outcomes around year-end shifted to the left and became more skewed to the downside. The market perception that risks to the policy rate tilted more to the downside accounts for the fact that the futures-based expected policy path shifted down more over the period and was consistent with around three rate cuts by year-end. The median modal path for the federal funds rate from the Survey of Market Expectations was not much changed and indicated 4 May 6 7, 2025 either two or three rate cuts this year. However, the survey pointed to increased disagreement across respondents as to the most likely path of policy. Despite the volatility in broader markets over the intermeeting period, money market functioning had remained orderly. Rates on Treasury repurchase agreements (repo) were somewhat higher, on