Fed Saw Inflation, Jobless, Stability Risks at May Meeting, Minutes Show

Economic

Forex

Summary:

The unemployment rate was 4.2% as of April; Fed officials consider 4.6% to represent the level sustainable in the long run with inflation steady at the central bank's 2% target.

U.S. Federal Reserve officials at their last meeting acknowledged they could face "difficult tradeoffs" in coming months in the form of rising inflation alongside rising unemployment, an outlook buttressed by concerns about financial market volatility and Fed staff warnings of increasing recession risk, according to minutes of the May 6-7 session.

The foreboding outlook has likely shifted since then following President Donald Trump's decision just a week after the meeting to postpone the severe import tariffs, including a 145% levy on goods from China, that had forced up bond yields, driven down stock prices, and led to widening predictions of a U.S. economic downturn.

But the minutes released on Wednesday still showed Fed policymakers and staff engaged in a consequential discussion of the likely fallout from Trump administration policies that remain in flux - with even the highest tariffs on hold but not yet withdrawn altogether.

Officials at the meeting noted that volatility in bond markets in the weeks before "warranted monitoring" as a possible risk to financial stability, and noted that a change in the U.S. dollar's safe-haven status, along with rising Treasury bond yields, "could have long-lasting implications for the economy."

Fed officials continue to cite the possibility of inflation and unemployment rising in tandem as a risk that would leave them forced to decide whether to prioritize fighting inflation with tighter monetary policy or cutting interest rates to support growth and employment.

"Almost all participants commented on the risk that inflation could prove to be more persistent than expected," as the economy adapted to higher import taxes proposed by the Trump administration.

"Participants noted that the (Federal Open Market) Committee might face difficult tradeoffs if inflation proves to be more persistent while the outlooks for growth and employment weaken," the minutes said. "Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer."

RISKS TO BOTH SIDES

The prospect of rising unemployment and higher inflation was outlined in staff briefings that projected a "markedly" higher inflation rate this year due to the impact of tariffs and a job market "expected to weaken substantially" with the unemployment rate rising above estimates of full employment by the end of this year and remaining there for two years.

The unemployment rate was 4.2% as of April; Fed officials consider 4.6% to represent the level sustainable in the long run with inflation steady at the central bank's 2% target.

The delay in the most aggressive tariffs to be imposed on China and other nations caused many analysts to lower their own estimated recession risks, which Fed staff as of early May had considered "almost as likely" as their baseline outlook of slowing but continued growth.

In theory those stiff tariffs are only on hold until July pending negotiations over final tax rates, with Fed officials and business executives left in the dark about key aspects of the upcoming economic landscape.

The uncertainty still felt today was also the watchword at the meeting in early May, when the Fed decided to hold the benchmark policy rate steady in the 4.25% to 4.5% range. In a press conference after the meeting, Fed Chair Jerome Powell indicated the central bank was effectively sidelined until the Trump administration finalizes its tariff plans and the impact on the economy becomes clearer, a view reiterated by Powell and other Fed policymakers in the weeks since.

The Fed next meets on June 17-18, when the central bank will release new projections from policymakers about their outlook for inflation, employment and economic growth in coming months and years, and the projected interest rate they feel would be appropriate.

At their March meeting the median projection among policymakers was for two quarter-point interest rate cuts by the end of 2025.

Source: Reuters

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Manuel

Commodity

Middle East Situation

Oil climbed as the market assessed the risk of additional US sanctions on Russia and the chance that nuclear talks with Iran will fail to produce an agreement.

West Texas Intermediate rose 1.6% to settle near $62 a barrel after President Donald Trump said Russian President Vladimir Putin was “playing with fire” by escalating attacks on Ukraine. The US is weighing additional sanctions on the country after aggressive measures against Russia’s oil industry earlier this year sent crude rallying past $80 a barrel. The commodity eased off of intraday highs on news that Russia-Ukraine talks will be held in Istanbul on June 2.

Elsewhere, the New York Times reported that Israeli Prime Minister Benjamin Netanyahu is pressing on with threats to disrupt talks between Washington and Tehran by striking Iran’s nuclear facilities. A wrong turn in the negotiations stands to crimp flows from the OPEC member.

Still, bearish forces loom in the background. OPEC+ on Wednesday ratified group-wide production quotas this year and next, ahead of a decision by eight key members over the weekend on whether to bolster output again in July. Members held preliminary talks last week on making a large production hike for a third consecutive month, according to delegates.

The early conference likely stifled any remaining hope among the broader group of OPEC+ members for a slower-than-anticipated production unwind, said Robert Yawger, director of the energy futures division at Mizuho Securities USA.

“Now, the market is at the mercy of OPEC on Saturday,” he said.

The ramp-up of idled production by OPEC and its allies has stoked fears about oversupply and added to the pressure on prices. Parts of the futures curve for Brent are in contango — a bearish structure that signals ample supply.

Oil has trended lower since mid-January, with sweeping tariffs from the Trump administration and retaliatory measures from targeted countries raising concerns about an economic slowdown. However, there has been some signs recently of easing trade tensions.

Source: Bloomberg

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Manuel

Cryptocurrency

Political

The US Department of Labor (DOL) formally rescinded a 2022 compliance release that discouraged fiduciaries from offering crypto investment options in 401(k) retirement plans, according to a May 28 announcement.

The decision withdraws “Compliance Assistance Release No. 2022-01,” which directed fiduciaries to exercise “extreme care” before including digital assets in retirement plan investment menus.

Neutrality restored

The Department now reverts to a neutral stance that adheres to the statutory language of the Employee Retirement Income Security Act (ERISA), which governs private-sector retirement plans.

In a statement, the Employee Benefits Security Administration acknowledged that the “extreme care” standard introduced in 2022 had no statutory basis in the law and departed from the department’s prior principles-based approach.

US Secretary of Labor Lori Chavez-DeRemer said:

“We’re rolling back this overreach and making it clear that investment decisions should be made by fiduciaries, not D.C. bureaucrats.”

While the Department’s announcement does not endorse or disapprove of crypto as retirement plan assets, it makes clear that investment discretion belongs to fiduciaries under ERISA.

The statement reiterates that fiduciaries must still comply with statutory obligations to act in the best interest of plan participants. Still, that determination must follow a consistent evaluative framework, not asset-specific cautionary directives.

Departing from ERISA precedent

On March 10, 2022, the Department released a compliance notice that warned plan fiduciaries against adding crypto investment options without heightened scrutiny.

The document flagged crypto’s volatility, custodial complexities, and regulatory uncertainty as grounds for caution, applying a threshold that critics argued exceeded the fiduciary duty standard defined under ERISA.

Historically, the Department maintained a neutral stance on specific asset classes, instead requiring fiduciaries to evaluate options based on risk, cost, and suitability in relation to plan objectives.

The 2022 release diverged from that tradition by singling out crypto as warranting special caution, despite ERISA’s requirement that fiduciaries act “with the care, skill, prudence, and diligence under the circumstances then prevailing.”

The Department’s revised guidance affirms that investment decisions must remain context-specific and grounded in a prudent review of all relevant factors.

By eliminating Compliance Release 2022-01, the Department reestablishes a uniform application of fiduciary principles under ERISA, allowing retirement plan administrators to assess crypto investment options on a case-by-case basis in line with existing legal obligations.

Source: CryptoSlate

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Manuel

Central Bank

Economic

Federal Reserve officials agreed earlier this month to hold off on any interest-rate moves while they evaluated the impact of President Donald Trump's tariffs on inflation, unemployment, and the broader economy.

According to minutes from their May 6-7 meeting, released Wednesday, “almost all” of the 19 officials that participate in the Fed's meetings on policy saw a risk that "inflation could prove to be more persistent than expected.” The policymakers showed greater concerns about higher inflation than rising unemployment, the minutes showed, a key reason they left rates unchanged.

Their decision flew in the face of Trump's repeated calls to reduce borrowing costs because, in his view, there is “NO INFLATION.” The central bank, led by Chair Jerome Powell, cut its key rate three times last year to about 4.3%. Federal Reserve staff economists said during the meeting that inflation “remained elevated,” the minutes showed.

Trump's tariffs have created a dilemma for the Fed because the duties could both raise inflation — which the Fed would typically fight with higher interest rates — and slow the economy and push up unemployment, which the central bank usually tries to counter with lower rates.

Officials “judged that downside risks to employment and ... upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases,” the minutes said.

Since the meeting, many officials have underscored that the Fed may have to wait for some time before making any further moves with interest rates.

Policymakers said there was “considerable uncertainty surrounding the evolution of trade policy" and its impacts on the economy, the minutes said.

“Taken together, (officials) saw the uncertainty about their economic outlooks as unusually elevated,” the minutes said.

At the same time, at least some Fed officials expressed a range of concerns that tariffs would likely raise prices in the months ahead. Many policymakers said that their surveys and discussions with business leaders suggested that companies were likely to pass at least some or all of the cost of the extra duties on to consumers. Several of the officials said that companies not affected by the tariffs could seek to raise their prices if other companies did so.

And the fact that the economy recently experienced the highest inflation in 40 years in 2022 suggested that companies might be more willing to raise prices than previously, when consumers had little experience of inflation, several officials said.

Source: AP Finance

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Thomas

Commodity

Economic

OPEC+ countries on Wednesday agreed to leave their formal output quotas unchanged, with market focus shifting toward potential increases from an eight-member subset of the alliance that had been carrying out separate voluntary production cuts.

The OPEC+ coalition has been operating a spate of formal production agreements that bind all members unanimously, along with two output cuts that are only informally tackled by an eight-member subset of the organization. Under formal policy, the entire OPEC+ group is cutting roughly 2 million barrels per day until the end of 2026.

On Wednesday, OPEC+ nations said they agreed to "reaffirm the level of overall crude oil production for OPEC and non-OPEC Participating Countries" as agreed during the alliance's December meeting.

Separate from formal policy, OPEC+ heavyweight Russia and Saudi Arabia, alongside Algeria, Iraq, Kazakhstan, Kuwait, Oman and the United Arab Emirates, are also trimming production by 1.66 million barrels per day until the end of next year, under one opt-in agreement.

Until the end of March, these eight members also implemented a second combined 2.2 million-barrel-per day voluntary production decline, which they have begun to gradually unwind in the months since. As of the latest announcements, these nations are set to bring back a combined roughly 1 million barrels per day of their previously cut volumes over April-June and will be assessing further production steps over the weekend.

The timing of these hikes has coincided with increasing concern within the OPEC+ group that some members — which have in the past included the likes of Kazakhstan, Iraq and Russia — were not respecting their production quotas.

"This group is doing its best, but it's not enough only this group, we need the help of others," UAE Energy Minister Suhail Mohamed al-Mazrouei said Tuesday in a World Utilities Congress panel moderated by CNBC's Dan Murphy.

On Wednesday, OPEC+ nations called on the OPEC Secretariat to assess each country's sustainable production capacity to determine their baselines for 2027 — levels used to calculate coalition members' output quotas under OPEC+ agreements.

OPEC+ members will next hold a ministerial meeting on Nov. 30.

Oil prices were in positive territory shortly after the ending of the OPEC+ meeting. The Ice Brent contract with July expiry was at $65.06 per barrel at 4:30 p.m. London time, up 1.5% from the Tuesday close price. Front-month July Nymex WTI futures were trading at $61.96 per barrel, up 1.76% from the previous day's settlement.

Summer spikes

Oil demand typically spikes during the summer with the start of the travel season and additional crude burn to produce electricity for air conditioning needs in several Middle Eastern countries.

In a note out earlier this week, UBS Strategist Giovanni Staunovo flagged a "closely balanced oil market" in the first quarter of this year, compared with a vast projected supply surplus.

"We expect further demand and supply revisions with more incoming data," Staunovo said. "With demand seasonally rising and the eight OPEC+ member states with additional voluntary cuts likely still adding more barrels to the market in July, we look for oil prices to move sideways in a USD 60-70/bbl range over the coming months."

The UAE's al-Mazrouei echoed this sentiment, flagging, "We need to be mindful of the demand. Demand is picking up. And demand is going to surprise us, if we're not investing enough."

Source: CNBC

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Owen Li

Economic

Japan’s $3.5 billion auction of 40-year government bonds on Wednesday just crashed through a ten-month low, drawing a bid-to-cover ratio of 2.2, the weakest level since July 2024, according to Financial Times.

That number measures how many bids were placed compared to how much debt was offered. For a bond market that usually runs on auto-pilot, this result was a siren.

The sale was part of Japan’s scheduled long-term debt issuance, but investor participation dropped fast as domestic life insurers and long-end buyers pulled away. The drop is being described by traders as a “buyers’ strike”.

The weak turnout followed a volatile day in the market. On Tuesday, yields on 40-year bonds dropped to 3.29%, hitting a three-week low, after reports that the finance ministry had reached out to investors and brokers.

That led to speculation the government might start cutting back on how much super-long debt it sells. But by the morning of the auction, that mood had flipped. Yields climbed back up to 3.32%, and after the result was announced, they pushed higher to 3.37%.

20-year auction triggered concern over longer-dated bonds

Last week’s auction of 20-year bonds triggered this round of anxiety. Demand was weak enough to push yields on that debt to 2.6%, a level not seen in decades. The damage didn’t stop there. Yields on 30-year bonds climbed to 3.185%, and 40-year bonds briefly hit 3.675%.

All of this fueled growing fears that Japan’s super-long debt market is no longer functioning the way it used to. Barclays analysts said the poor showing confirmed a fragile supply-demand balance, especially as private-sector interest continues to vanish.

Prime Minister Shigeru Ishiba added even more pressure last week by comparing Japan’s fiscal position to Greece — a name nobody in Tokyo wants to be in the same sentence with. Japan’s debt-to-GDP ratio has been above 200% since 2020. That number hasn’t budged. The weight of government borrowing has now collided with a change in investor behavior, and it’s making everyone nervous.

Officials monitor but give no clear signals

Before the auction, Finance Minister Katsunobu Kato told reporters he was “closely monitoring” developments in the bond market.

At the same time, Kazuo Ueda, who heads the Bank of Japan, said the central bank is watching volatility in super-long yields, with a focus on how it might affect the rest of the curve, especially short-term bonds. Traders are reading those comments as wait-and-see — not exactly comforting given how fast yields have been moving.

Stephen Spratt, a strategist at Société Générale, said the results were “soft, but in line” with what the market was expecting. “The headlines will say lowest since last July, but in the context of a broad shock in yields, the result wasn’t too shocking,” he said.

Still, none of this is happening in a vacuum. Bond markets in other rich countries have also been selling off as investors wake up to the reality of more spending, more borrowing, and not enough answers. But in Japan, the market’s issues are layered.

The country is still trying to pull itself out of an ultra-loose monetary policy era. That exit has been dragging since the central bank started signaling cuts to bond buying.

In June 2024, the BoJ announced it would start reducing its JGB purchases at a rate of ¥400 billion ($2.75 billion) per quarter. That reduction is planned to continue from August 2024 through March 2026. The problem now is that as public buying scales down, private-sector demand hasn’t stepped up. And with life insurers and domestic funds staying on the sidelines, the gaps are showing… fast.

Source: CryptoSlate

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Devin

Middle East Situation

Iran could halt its uranium enrichment if the United States agrees to release frozen Iranian funds and recognizes Tehran’s right to refine uranium for civilian use, according to Reuters, citing two Iranian official sources. The sources, who are close to the negotiating team, indicated on Wednesday that a "political understanding" with the U.S. could soon be reached if Washington agrees to Tehran’s conditions. However, one source said the matter has not yet been discussed during the talks with the United States.

The sources revealed that under such an agreement, Tehran would stop uranium enrichment for a year and either ship part of its highly enriched stock abroad or convert it into fuel plates for civilian nuclear purposes. This temporary pause in enrichment could help overcome a deadlock that has persisted after five rounds of talks between Iranian Foreign Minister Abbas Araqchi and Trump’s Middle East envoy Steve Witkoff.

U.S. officials have consistently stated that any new nuclear deal with Iran must include a commitment to abandon enrichment, which is seen as a potential route to developing nuclear weapons. Iran, however, has repeatedly denied such intentions, asserting that it seeks nuclear energy solely for civilian purposes. It has publicly rejected Washington’s demand to abandon enrichment as an assault on its national sovereignty.

The Iranian sources emphasized that Tehran would not agree to dismantle its nuclear program or infrastructure, or seal its nuclear installations, as demanded by U.S. President Donald Trump’s administration. Instead, they said, Trump must publicly acknowledge Iran’s sovereign right to enrichment as a member of the nuclear Non-Proliferation Treaty and authorize a release of Iranian oil revenues frozen by sanctions, including $6 billion in Qatar.

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