In a shift from earlier signals hinting at rate cuts, the minutes from the April meeting show that discussions of interest rate hikes have moved from the periphery to the mainstream. Inflation is the core variable driving this collective hawkish pivot among officials. On May 20, local time, the Federal Reserve released the minutes from the Federal Open Market Committee (FOMC) monetary policy meeting held on April 28-29. The minutes conveyed a strong hawkish signal, with a "majority" of policymakers indicating that "some further policy firming may be appropriate" if inflation remains persistently high due to the ongoing conflict in Iran. "Many" participants expressed a preference to remove language from the post-meeting statement that suggested a bias toward easing. At the final monetary policy meeting of the "Powell era," four out of twelve voting members dissented, marking the largest split within the decision-making body since 1992. These minutes have cast a significant shadow of inflation anxiety over the market regarding the Fed's upcoming leadership transition.
The Hawkish Pivot The late-April FOMC meeting decided to keep the target range for the federal funds rate unchanged at 3.50% to 3.75% for the third consecutive time. However, beneath this surface-level "inaction," the Fed is undergoing its most profound policy shift in a generation. The minutes revealed that participants "generally judged" that, given persistently high inflation data and uncertainty from the Middle East conflict, maintaining the current policy stance might be necessary for longer than previously anticipated. Some participants noted that if inflation's downward trajectory resumed or the labor market weakened significantly, rate cuts could become appropriate. However, the minutes then pivoted: "A majority of participants emphasized that if inflation were to persist above 2 percent, it could become appropriate to implement some degree of policy tightening." This language marks a critical turning point in Fed policy discussions. Unlike the rhetoric of potential rate cuts at the start of the year, the April minutes show rate hikes have become a central topic. Within the Fed's precise terminology, "A majority of" carries significantly more weight than "Several," indicating a dominant number of policymakers hold this view. More notably, the minutes also revealed: "Many participants indicated that they had been inclined to remove from the postmeeting statement language indicating that the Committee's future policy decisions would be informed by a bias toward easing." In the Fed's lexicon, "Many" represents a number lower than "A majority" but higher than "Several." This suggests that, beyond the four known dissenting voters, a group of non-voting members also hold a similarly hawkish stance. At the April meeting, Cleveland Fed President Harker, Minneapolis Fed President Kashkari, and Dallas Fed President Logan voted against retaining the "bias toward easing" language in the statement. Meanwhile, Governor Mester dissented in the opposite direction, favoring a 25-basis-point rate cut. The 8-to-4 vote was the most divided since 1992. Inflation is the core variable driving the collective hawkish shift among officials. The minutes noted that "almost all" participants acknowledged the risk that the Middle East conflict could be prolonged, and a "vast majority" assessed that returning inflation to the 2% target would take longer than previously thought. Some participants even expressed concern that the combined effects of tariffs and persistently high energy prices could lead to an "unanchoring" of inflation expectations, forcing the Fed into a more difficult trade-off between employment and inflation. Commenting on this, Ryan Sweet, Chief Global Economist at Oxford Economics, stated: "Although the June meeting will be chaired by the new Fed Chair, reaching a consensus on moving rates in any direction in the near term will be a formidable task."
The "Warsh Era" Begins The release of these hawkish minutes coincides with a critical moment in the Fed's leadership transition. Kevin Warsh is expected to be formally sworn in as Fed Chair on May 22 (this Friday). Markets are reassessing the potential path of Fed policy this year under the new chair's leadership. Previously, Warsh was viewed by markets as a potential dove due to his past comments supporting rate cuts, and former President Trump had publicly called for rapid rate cuts upon his appointment. However, facing the current reality of stubborn inflation, market expectations have done a 180-degree turn. David Russell, Global Market Strategist at TradeStation, noted: "Rate hikes are back on the table. With Warsh about to take the helm, the Committee's stance is becoming more hawkish." Market pricing fully reflects this shift. The CME Group's FedWatch Tool shows traders now assign a probability exceeding 60%—and at one point soaring above 80%—that the Fed will raise rates by at least 25 basis points by December 2026. In contrast, as recently as February, the market widely expected two to three rate cuts within the year. Economists at Barclays pointed out in a report that while their baseline forecast remains for no policy change throughout 2026 and the first rate cut in March 2027, the upside risks to the policy rate have intensified significantly.
The core factor driving this reversal in market expectations is persistently high inflation data. The U.S. Consumer Price Index (CPI) rose 3.8% year-over-year in April, hitting a nearly three-year high; core CPI rose 2.8% year-over-year, also exceeding expectations. Soaring energy prices due to the Iran conflict are a primary driver, and this cost pressure is spreading to a broader range of goods and services. Analysts at Deutsche Bank believe that stronger-than-expected U.S. economic data, combined with a steady stream of hawkish commentary from Fed officials, continues to push U.S. Treasury yields higher, fueling increasingly hawkish market expectations. Analysts have outlined several potential paths that could trigger a Fed rate hike in 2026. Barclays notes the primary risk is an "unanchoring" of long-term inflation expectations, meaning markets begin to doubt the Fed's resolve to defend its 2% inflation target. Secondly, if core inflation (excluding energy and food) remains persistently above target even after tariff effects fade—for example, if the core Personal Consumption Expenditures (PCE) index continues to rise month-over-month above 0.18%—it would also force the Fed to act. A third path relates to the artificial intelligence (AI) investment boom. If the capital expenditures and wealth effects from AI materialize before significant productivity gains, it could boost aggregate demand and lead to an overheated economy. However, the challenges facing Chair Warsh are immense. He must not only manage the interest burden from the nearly $40 trillion national debt but also balance calls for rate cuts from former President Trump with the Fed's independence. Additionally, former Chair Powell will remain on the Board of Governors until 2028, meaning his influence will persist, potentially creating internal friction as Warsh seeks to implement his policy agenda.
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