Minutes from the Federal Reserve's latest meeting indicate heightened concerns among officials over inflation pressures exacerbated by the Iran conflict, with a growing number of policymakers expressing openness to the possibility of raising interest rates. This suggests incoming Chair Kevin Warsh will inherit a core committee increasingly leaning toward a hawkish stance.
The minutes, released Wednesday, show that a majority of Fed policymakers at the April 28-29 meeting believed that "a modest tightening of policy could be appropriate" if inflation continues to run above the central bank's 2% target.
According to the minutes, "In response to that possibility, many participants indicated they would prefer to remove language from the post-meeting statement that suggested the committee’s future rate decisions were tilted toward easing."
In the Fed's precise terminology, "many" is slightly less than "a majority," implying the four regional Fed presidents who dissented in favor of keeping the statement unchanged had support from at least an equal number of non-voting members.
Altering the statement could be seen as constraining the new Fed chair—who, prior to the outbreak of the Iran war, had expressed support for rate cuts.
The minutes stated that policymakers "generally judged" they would need to keep the policy rate unchanged for longer than previously anticipated. A "substantial majority" noted that risks had increased that inflation would take longer to return to the 2% target than they had earlier thought, though they "generally expected" labor market conditions to remain firm in the near term.
In fact, while several policymakers did believe rate cuts would be appropriate once inflation eased, that number was smaller than the "many" who held that view at the March meeting.
Ryan Sweet, Chief Global Economist at Oxford Economics, said, "Although the June meeting will be chaired by the new Fed chair, reaching a consensus on moving rates in either direction in the near term will be a difficult task."
This detailed account of the most divided Fed policy meeting in a generation provides key details on the shifting dynamics between two camps of policymakers awaiting Warsh's leadership: a growing camp wary of war-driven inflation and any talk of future rate cuts, and a shrinking camp still inclined to lower borrowing costs.
The primary driver behind policymakers' further shift toward hawkishness remains inflation pressures, intensified by the U.S.- and Israel-led war against Iran. The nearly three-month conflict has driven up energy prices and triggered cost pressures across a growing range of goods and services.
The minutes show the April meeting—the final one chaired by Jerome Powell—was the second consecutive meeting where more policymakers than in the prior policy session believed rate hikes could be appropriate if inflation remained above target.
Warsh, who has said he enjoys "good arguments within the family," has himself made arguments supporting lower rates. He will be sworn in as Fed chair at a White House ceremony presided over by U.S. President Donald Trump, who appointed Warsh and explicitly called for significant rate cuts. The minutes illustrate how difficult it will be to prevail in the debate over easing policy—even as Trump himself has recently downplayed such expectations.
The Fed's rate-setting Federal Open Market Committee last month left the short-term policy rate unchanged in a range of 3.50% to 3.75%, but with four policymakers dissenting, the most since 1992.
Moreover, the dissents were split. Another Trump appointee, Governor Stephen Milan, who will leave the Fed on Friday to make way for Warsh, again voted for a rate cut. Meanwhile, the other three policymakers objected to continuing to use language in the accompanying policy statement that suggested the Fed might still cut rates.
These three, along with other policymakers in the weeks following the meeting, pointed out that inflation remains well above the Fed's 2% target and may deviate further in the near term due to the broadening of price pressures intensified by the U.S.- and Israel-led war against Iran. The conflict has driven oil prices up more than 50%, and the latest consumer and wholesale inflation data show price pressures have begun to spread beyond the energy sector.
They also noted that steady unemployment and two consecutive months of stronger-than-expected job growth indicate the labor market remains resilient and does not require lower interest rates for support.
Following Powell's eight-year tenure, Warsh will convene his first Fed meeting on June 16-17, with no change in rates expected and a cut seen as even less likely.
Indeed, U.S. and global bond markets increasingly reflect a belief that the Fed and other major central banks will raise rates before long to combat war-driven inflation. The yield on the two-year U.S. Treasury note, a barometer of Fed policy expectations, has surged from just below 3.40% on February 27—the day before U.S. and Israeli airstrikes began against Iran—to above 4.10% on Tuesday, a 15-month high.
Meanwhile, a survey released Tuesday showed economists have dramatically shifted their previously firm expectations for rate cuts this year. Fewer than 50% now anticipate a cut before December, down from two-thirds a month ago. About half of respondents expect no change in rates this year, with a minority forecasting at least one rate hike.
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