Fed minutes flag higher inflation and recession risks

29 May 2025 , 10:24 AM

FED EXPLAINS WHY STATUS QUO SINCE DECEMBER 2024

After 3 rounds of rate cuts between September 2024 and December 2024, to the tune of 100 bps, the Fed has held rates in the range of 4.25%-4.50% in 2025. The minutes of the May 07, 2025 FOMC meet, published on May 28, 2025; underlined that the direction of fiscal and trade policy was still very uncertain. The only difference since the previous Fed policy was the 90-day pause in tariffs; but that has only added to the uncertainty. Above all, Fed emphasized in its minutes that the FOMC could face some very difficult trade-offs on the policy front, if tariffs hardened inflation and simultaneously weakened growth and jobs. That is what Fed has been referring to as an avoidable “Stagflation” scenario.

WHAT WE READ FROM MINUTES OF THE FOMC MAY-25 MEET?

Here are key inferences that we drew from a reading of the Fed minutes published on May 28, 2025.

• Fed underscored that inflation was well in control under 2.5%, with jobs and GDP growth still cyclically stable. Hence, there was no need for the Fed to act in haste on the policy front. The current macros afforded the Fed the luxury of waiting and watching.
• FOMC has refused to be drawn into second-guessing the trajectory of trade policy and fiscal policy. Inflation risks have become elevated on tariff fears and the “Big & Beautiful Bill” is likely to impose an additional burden of $3.8 Trillion on the US fisc.
• Fed minutes also underline that a combination of steep tariffs and fiscal excesses could make the Fed’s dual mandate of price stability and near full-employment complicated. To keep policy options open, Fed may wait and watch till September 2025.
• On the topic of altering the inflation goal; the Fed minutes clarified that while target inflation may be held at above 2% for a longer period of time, the 2% goal was unlikely to change for now. After all, policy had to be robust to cover diverse macro scenarios.
• The focus shifts to PCE inflation and second estimate of Q1-GDP to be put out by US-BEA on Thursday and Friday this week. For now, Goldman Sachs has suggested substantially raising the allocation to gold in the portfolio, considering multiple uncertainty factors.

Let us turn to what CME Fedwatch says about rates trajectory.

CME FEDWATCH HINTS AT ONE RATE CUT IN 2025 AND TWO IN 2026

The CME Fedwatch is based on implied probabilities of Fed Futures trading.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.5%	99.5%
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	0.1%	22.0%	77.9%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	9.3%	45.5%	45.2%
Oct-25	Nil	Nil	Nil	Nil	Nil	Nil	4.4%	26.3%	45.3%	24.0%
Dec-25	Nil	Nil	Nil	Nil	Nil	2.8%	18.3%	38.3%	31.8%	8.8%
Jun-26	Nil	0.1%	0.8%	4.2%	13.2%	24.7%	28.5%	19.8%	7.5%	1.2%
Dec-26	0.5%	2.0%	6.4%	14.3%	22.3%	24.5%	18.3%	8.9%	2.5%	0.3%

Data source: CME Fedwatch

We have CME Fedwatch expectations till December 2026; although the 2025 probabilities are more reliable due to their proximity.

• CME Fedwatch suggests that there will be just 1 rate cut in 2025. September rate cut is still tentative (55:45), but 25 bps cut looks more decisive in October at 76% probability.
• Markets are still factoring in an 88.3% probability of 2 additional rate cuts in 2026, although this situation is still evolving; and 2025 outlook itself is pretty hazy.

What do these minutes suggest for the RBI policy trajectory? The RBI has cut rates by 50 bps in February and April, and may add another 25 bps rate cut in June. However, considering the complicated global scenario, RBI is likely to hold status quo after that. After all, with robust GDP growth and low inflation; the RBI too can afford to wait!