Rising tariffs could reignite inflation while shifts in global investor confidence may undermine the U.S. dollar's safe-haven status, according to the Federal Reserve's May meeting minutes, which reflect growing concern over lasting economic headwinds.

Tariffs And Inflation: A Risky Combination

Participants agreed inflation had eased since its 2022 peak but remains "somewhat elevated" and could accelerate due to new trade barriers.

"Participants judged that it was likely to be boosted by the effects of higher tariffs, although significant uncertainty surrounded those effects," the minutes stated.

Reports from businesses and surveys suggest that "firms generally were planning to either partially or fully pass on tariff-related cost increases to consumers."

Some participants warned that even firms unaffected by tariffs might use the price environment as cover to raise their own.

Several Fed officials noted rising short-term inflation expectations in markets and surveys, which could pressure firms to keep raising prices.

Although long-term expectations remain anchored, the risk of upward drift remains. "Some participants saw the risk that they could drift upward, which could put additional upward pressure on inflation," according to the minutes.

Tariffs on intermediate goods and related supply chain disruptions were seen as potentially contributing to "a more persistent increase in inflation," echoing the kind of price stickiness seen during the pandemic era.

US Assets And Financial Volatility: A Growing Concern

Multiple participants raised alarms over financial market behavior in April, highlighting that "heightened volatility" had emerged across asset classes.

Particularly notable was the unusual pattern of longer-term Treasury yields rising while the dollar depreciated, even as equity prices fell.

Such a divergence, they said, could signal deeper shifts.

"Participants noted that a durable shift in such correlations or a diminution of the perceived safe-haven status of U.S. assets could have long-lasting implications for the economy."

These concerns intersect with broader financial vulnerabilities. While household and corporate balance sheets appear healthy, some participants flagged "high levels of leverage at hedge funds" and potential risks from the private credit market.

They added that higher rates or an economic downturn could amplify these issues.

Labor Market: Resilient But At Risk

The Fed found labor market conditions to be "broadly in balance," with unemployment stable and layoffs low. But some businesses have started "limiting or pausing hiring because of elevated uncertainty," and participants acknowledged a growing risk of labor market weakness in the months ahead.

Importantly, officials downplayed the labor market as a major inflation driver for now. "Several participants commented that labor market conditions were unlikely to be a source of inflationary pressure."

Economic Growth: Stable, But Threatened by Policy Uncertainty

The Fed recognized solid economic momentum, with consumer spending strong in March and private domestic final purchases—a key growth measure—rising in the first quarter. Yet, real GDP dipped slightly, possibly due to statistical quirks involving a surge in pre-tariff imports.

Even so, sentiment is softening. "Several participants noted that their contacts or surveys reported sharp declines in business sentiment," and many firms are delaying capital expenditures. Retailers, manufacturers and small businesses appear most exposed to tariff pressures.

Market Reactions

Stocks remained broadly unchanged in reaction to the minutes, with the SPDR S&P 500 ETF Trust ( SPY ) still down 0.1% for the day.

Yields on 30-year Treasury bonds slightly softened to 4.98%, with the iShares 20+ Year Treasury Bond ETF trimming session losses.

The dollar held onto session gains, with the U.S. dollar index, which is tracked by the Invesco DB USD Index Bullish Fund ETF , up 0.3%.

Read now: Nvidia Bullish Ahead Of Q1 Earnings, But Will H20 Chip Woes Dampen The Party?