Fed’s meeting minutes.
It’s always stimulating to read the Fed’s meeting minutes.
There’s a certain understated drama in them. The kind where a few lines quietly hint at how the world’s biggest central bank might steer the economy. For someone like me, who often lives between economic headlines and strategic footnotes, these documents are pure gold.
And let’s be honest—Fed rate cuts, or even whispers about them, move markets like few other things. They influence not just Wall Street but global borrowing costs, investor confidence, and the decisions of small business owners trying to forecast the next six months.
So when I read the May 2025 FOMC minutes, one idea stood out clearly (even if not loudly):
The Fed might be rethinking one of its major post-pandemic innovations—Flexible Average Inflation Targeting, or FAIT.
A Quick Recap: What Was FAIT All About?
FAIT was introduced around 2020, after years of inflation being too low. The Fed was stuck with rates close to zero—the so-called Effective Lower Bound (ELB)—and traditional tools weren’t doing much to boost economic activity.
So the Fed changed its approach. Instead of just targeting 2% inflation every year, it said:
“If inflation is below 2% for a while, we’ll let it go above 2% for a bit to make up for lost ground.”
In theory, this would keep people’s inflation expectations in check—and encourage them to spend and invest, knowing that the Fed was committed to an average target.
Fast Forward to Today
The world has changed. The challenges of 2025 are not those of 2019.
- Inflation is no longer too low—if anything, it’s been too high at times.
- Interest rates are not pinned at zero—the Fed has room to cut if needed.
- And we’re dealing with a different breed of inflation shocks—tariffs, global supply shifts, geopolitical tensions, and labour constraints.
So in the May 2025 meeting, Fed officials quietly opened the door to moving away from FAIT. Not because it failed—but because the world it was designed for no longer exists.
They noted that FAIT made sense when the economy risked getting stuck in low inflation forever. But in today’s world, with inflation already elevated, that strategy might actually do more harm than good—keeping inflation too high for too long.
Flexible Average Inflation Targeting (FAIT): Then vs. Now
| 🔍 Before (Pre-2020) | 🔁 Fed’s Response | 🌍 Now (2025) |
|---|---|---|
| Inflation persistently below 2% target | Introduced FAIT: allow inflation to run above 2% for a while to average out past shortfalls | Inflation somewhat elevated after pandemic + tariffs |
| Interest rates stuck near zero (Effective Lower Bound risk) | Helped anchor expectations, stimulated economy even at low rates | ELB risk now less prominent; room to cut if needed |
| Risk of low inflation expectations becoming “stuck” | Promised temporary “catch-up” inflation to restore credibility | Risk has flipped: potential for persistent high inflation |
| Needed to signal commitment to 2% target | FAIT useful in low-demand, low-inflation world | FAIT less effective in volatile, high-inflation environment |
What the Fed Might Do Instead
From the tone and discussions in the minutes, it seems the Fed is leaning back toward a more traditional approach:
- Aim for 2% inflation, but don’t try to “make up” for past misses
- Stay flexible and responsive to shocks, without locking into formulaic responses
- Keep the ability to act forcefully if ELB risks return, but don’t assume they will
It’s like a return to classic inflation targeting—just with more muscle memory from recent crises.
Why This Matters (Even If You’re Not a Fed Watcher)
This isn’t just central bank philosophy. It has real-world consequences:
- If the Fed no longer tolerates above-target inflation to make up for the past, future rate cuts might come with more conditions.
- Businesses may face higher borrowing costs for longer if inflation proves sticky.
- And policymakers across the globe—from emerging markets to trade negotiators—watch these signals to decide how to position their own economies.
The Fed is essentially recalibrating. Not panicking, not overreacting—just adapting to a more complex, multipolar economic reality.
Final Thought
Reading the FOMC minutes is a bit like listening in on a very cautious group of pilots discussing how to adjust course mid-flight. Nothing flashy. But every word tells you something about their radar, their altitude, and the turbulence ahead.
What I took away from this meeting is that the Fed no longer sees FAIT as a one-size-fits-all answer. They’re not abandoning it outright, but they’re clearly reconsidering its place in a post-pandemic world.
And in that shift lies the beginning of a new chapter in how the world’s most influential central bank thinks about risk, resilience, and responsibility.
Source: https://www.federalreserve.gov/newsevents/pressreleases/monetary20250528a.htm
