Fed: Economic growth remains strong, recession risks rising

Minutes from the Federal Reserve’s May policy meeting showed officials agreed that economic activity had continued to expand steadily since the start of the year, though the likelihood of a recession had become more pronounced.

The minutes, released Wednesday, noted that fluctuations in net exports weighed on growth in the first quarter, as businesses ramped up imports in an effort to front-run potential tariff hikes.

Fed staff revised down their projections for real GDP growth in 2025 and 2026, compared to their March outlook, citing concerns that trade policies could hamper productivity growth and weigh on the economy over the next few years.

Moreover, the risk of the economy tipping into recession was now tilted to the downside and broadly on par with the baseline scenario for continued growth.

Federal Open Market Committee (FOMC) members acknowledged that labor market conditions remained solid, with the unemployment rate holding near historically low levels.

However, they also noted that inflation remained somewhat elevated and that uncertainty over the economic outlook had intensified—posing risks to the Fed’s ability to meet its dual mandate, particularly as both inflation and unemployment risks appeared to be rising.

Given the growing uncertainty, FOMC members emphasized the need for a cautious approach until the full effects of recent shifts in government policy become clearer.

They warned that the central bank could face a dilemma if disinflation proves difficult to achieve amid deteriorating prospects for economic growth and employment.

Despite strong momentum in both the economy and labor market, policymakers viewed the current monetary stance as moderately restrictive and said the Fed remained in a position to watch and wait.

The two-day meeting, held on May 6–7, ended with the Fed holding its benchmark interest rate steady in the 4.25%–4.50% range for a third straight time. The decision followed preliminary data showing an unexpected 0.3% contraction in first-quarter GDP.