If you have trouble getting to sleep at night, one of the surest cures is to read the minutes of the Federal Reserve Board’s Open Market Committee—the summary of a group conversation among the economists who set policy every quarter, mostly to decide if fed funds rates should be raised or lowered. The prose is generally bland and somewhat technical, and rarely offers a lot of insights that most of us wouldn’t know already.
But the recently-released minutes of the May 6-7 meeting include a few of what might be called Zingers—or at least the Fed equivalent. When assessing whether to raise or lower rates to fight inflation or stimulate the economy, the economists noted the “significant market volatility over the intermeeting period” (meaning the spooky stock market in the two months since they last gathered together). They also pointed out that “the dollar depreciated,” and “recently-announced trade policy” (meaning the on-again-off-again tariffs) have created a “supply shock that could restrain domestic activity relative to foreign activity.”
And what of those tariffs? “Tariff announcements led to a significant deterioration in global risk sentiment, which largely reversed following a subsequent pause of some of the tariffs,” the economists reported, basically telling us that investors don’t like any of the tariff proposals. Later: “The staff projection for real GDP growth in 2025 and 2026 was weaker than the one prepared for the March meeting, as announced trade policies implied a larger drag on real activity… the labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff ’s estimate of its natural rate.” Meaning the economists expect more people to be laid off before long.
The notes pointed to the fact that a surveyed group of outside economists “had materially lowered their GDP forecasts and raised their inflation forecasts for this year, while significantly increasing the probability on a recession occurring within the next six months.” And the minutes said that ‘Measures of Treasury market liquidity deteriorated immediately after the announcements of higher-than-expected tariffs… commensurate with the historical relationship between measures of market volatility and liquidity.”
The situation was stable for now, the economists decided, but the minutes seem to be a warning that the investment markets, inflation, the unemployment rate and the value of the dollar are all dependent on an end to the tariff politics coming out of Washington. It’s something to watch, and maybe it’s also time to fasten our seat belts a bit tighter at this unpredictable part of the investment roller coaster.
The Ups And Downs That Have No Meaning
We’ve now experienced four months of a very bumpy ride in market returns. In February, the S&P 500 fell 1.4% and the Nasdaq Composite declined 3.9%. March: down 5.6% and 7.6%, respectively. April: down 0.8% for the S&P 500 but a small (0.88%) gain for Nasdaq. May: the S&P 500 jumped up 6.29% while the Nasdaq Composite surged 9.6%. Of course, daily surges and declines were even bumpier, and even the intra-day trading showed some wild swings, as the markets tried to communicate with the President over the tariff policies, and each time the President listened and (in general) relented. But there must be underlying drivers other than Presidential tariff announcements that impact whether the markets are generous or alarming. The prospect of a recession is somewhat alarming; the fact that the Federal Reserve (rather than market pundits looking for attention) is taking the possibility of a recession seriously should give us all something to think about.
At the same time, one of the indicators that the markets could leap ahead is the amount of money sitting on the sidelines, presumably waiting to get back into what market analysts call ‘risk assets.’ At the moment, according to the Investment Company Institute, investors have set aside a total of $6.948 trillion in money market funds, up from $6.066 trillion a year ago. And the economy, to the surprise of some economists, grew at a 1.0% rate in April, in part due to a rise in consumer spending.
All of this is interesting to watch, but ultimately, the markets will do whatever they want, driven more by emotion than logic or underlying fundamentals—in the short term. In the long term, millions of people go to work every day to make their companies incrementally more valuable, day by day, week by week, year by year, and eventually, if the past is any indicator, those increasing values will be reflected in market valuations. And we’ll probably all forget how bumpy the ride was in the meantime.
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Sources:
https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20250507.pdf
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