reading the federal reserve tea leaves

We’re now nearly halfway through 2025, and each of this year’s meetings of the Federal Open Market Committee (FOMC) has concluded with the federal funds rate being held where it is. The latest session on May 6 marked the third straight meeting without a rate change, with markets widely expecting the Fed to maintain this stance at its next meeting, set for June 18. 

This lack of movement in the federal funds rate may give the false impression that the Fed’s perspective on the economy and the need for a rate move hasn’t changed, even as conditions have continued to evolve. For additional insight into the Fed’s views, it’s useful to parse the FOMC’s meeting minutes, which are released a few weeks after each session, as they provide valuable context to the Fed’s internal deliberations and offer a clearer view of how policymakers may approach the months ahead.

The minutes from the latest (May) meeting were just released, and here are the three key takeaways.

1. Vote was unanimous, but underlying uncertainty is growing.

All 12 voting members agreed to hold rates steady, reflecting a consensus “wait-and-see” approach. The Fed’s voting record has shown strong alignment among members in recent meetings. During times of heightened economic sensitivity or policy transition (as we are in now), it isn’t uncommon to see division among Fed officials. For instance, in 2019, both the June and September meetings saw multiple dissenting votes, with some officials advocating for deeper cuts and others preferring to hold steady.

By contrast, recent dissent has been limited to just one or two members, often favoring a more cautious pace of easing. Governor Hammack voted to maintain rates in December instead of cutting, and Bowman preferred a 25-basis-point cut in September rather than the 50 basis points ultimately implemented.

At the same time, the minutes reveal growing unease about the Fed’s ability to accurately forecast. The May session was the first FOMC meeting since the first round of tariffs took effect on April 1, and trade policy dominated much of the discussion. The trade war has been turbulent as of late, even by its own standards: courts temporarily paused tariff enforcementfrom 25% to 50% on May 30th after legal challenges, only to reinstate them the following day as deliberations continue. The White House also now has doubled import tariffs on steel and aluminum, while the results of the 90-day pause with China to allow for negotiations remain to be seen. This uncertainty was evident in the minutes, with officials repeatedly emphasizing that the near daily cadence of updates on this front makes it virtually impossible to predict the future path of the economy.

2. Officials are reconsidering the inflation target framework.

The Fed’s long-standing mandate is to maintain inflation at around 2% annually. But from 2010 to 2020, inflation ran consistently below that level, with core PCE averaging just 1.6% over the decade. Normally, the Fed would lower interest rates to help lift inflation, but during that stretch, it ran into the “effective lower bound”—a point where rates were already so low that there was little room to cut further.

In 2020, the Fed introduced a new framework known as “Flexible Average Inflation Targeting” (FAIT) in response. Rather than aiming for 2% at all times, the idea was to average it over time. That meant letting inflation run above target for a while if it had previously been too low, which was seen as a way to increase policy flexibility and avoid overreacting to temporary increases.

Critics say this approach slowed the Fed’s response when inflation began rising in 2021. Instead of acting quickly, the committee allowed inflation to remain elevated longer than it might have under the old model. The framework is now up for review after five years, and will continue to be debated in subsequent meetings. So far, officials have acknowledged that FAIT has significantly less value during times of greatly elevated inflation as seen in recent years.

3. The Fed views the odds of recession as increasingly likely.

For years, the Fed’s main forecast has been a “soft landing”—slowing inflation and growth without causing a recession or significant damage to the labor market or wider economy. However, in the May meeting, the Fed stated that in its assessment, the risk of recession is now “almost as likely” as their baseline forecast.

While no new concrete forecasts were released with these minutes, updated projections on inflation, employment, and growth will be released at the next meeting. In addition, the Fed will update its so-called “dot plot”, which will show where each member expects interest rates to go in the near future, as well as over the long run.

Taken together, the minutes show a committee that is actively grappling with deepening economic uncertainty—much of it driven by factors outside its control. While inflation has come down significantly from its peak, the Fed may soon face hard choices if signs of labor market weakness begin to emerge. Balancing progress on inflation with its full employment mandate could become more difficult in the months ahead. We’ll be watching upcoming meetings and minutes closely as policymakers continue to navigate these competing pressures.