The Federal Reserve released the minutes from its April FOMC meeting, laying bare the deepest internal divisions seen in decades. The minutes sent a clear signal to markets: concerns about inflation have taken center stage, and policymakers are quietly preparing the groundwork for potential interest rate hikes.
This final meeting chaired by outgoing Chair Powell not only exposed intense debates between hawks and doves within the Fed but also signaled that incoming Chair Kevin Warsh is set to inherit a committee leaning increasingly toward a more hawkish stance.
Geopolitical tensions have been a key driver of rising inflation. The ongoing conflict involving Iran has pushed international oil prices up by more than 50% over the past month, spreading price pressures beyond the energy sector. This development has alarmed a growing number of Fed officials, who have stated the central bank needs to prepare its policy framework in advance to be ready to raise rates should inflation remain persistently high.
During the April 28-29 meeting, a strong consensus emerged among FOMC policymakers: if inflation data consistently exceeds the 2% target, modest monetary tightening will become necessary. Consequently, most officials present argued for removing language from the post-meeting statement that suggested potential future rate cuts, decisively abandoning any easing bias.
The minutes clearly illustrate the growing divide within the Fed. On one side, an expanding hawkish camp is deeply concerned about inflation risks stemming from the Iran conflict and firmly opposes any discussion of rate cuts. On the other, a shrinking dovish faction continues to advocate for maintaining an accommodative stance and lowering borrowing costs.
This division was directly reflected in the voting outcome. The Federal Open Market Committee ultimately voted to keep the short-term interest rate target range unchanged at 3.50% to 3.75%, but four officials dissented—the highest number of dissenting votes since 1992. The dissenting views were polarized: Fed Governor Stephen Milan (who is stepping down to make way for Warsh), a Trump appointee, dissented in favor of cutting rates again, while three other officials strongly objected to retaining language in the statement that left the door open for potential rate cuts.
The rise of the hawkish faction is primarily driven by broadening inflationary pressures. Recent data shows the U.S. inflation rate climbed to 3.3% in March, a two-year high. Both the IMF and OECD have raised their full-year inflation forecasts to 3.2% and 4.2% respectively, significantly above the Fed's 2% target. More alarmingly, price pressures have spread from energy to sectors like food and transportation. The price of nitrogen fertilizer has risen 30% since the conflict began, and increased trucking costs are being passed on to food companies.
Simultaneously, the resilience of the U.S. labor market provides further support for the hawks. The unemployment rate remains stable, and April's non-farm payrolls added 115,000 jobs, far exceeding expectations and marking the second consecutive month of strong job growth, suggesting the economy does not require rate cuts for support.
Incoming Chair Warsh, who will preside over his first policy meeting on June 16-17, faces a complex policy dilemma. Although he has previously expressed support for rate cuts, and his nominator, former President Trump, had frequently demanded significant rate reductions, the meeting minutes indicate strong resistance to further easing. Recent comments from Trump suggest he has also lowered his expectations for cuts. Market consensus currently expects Warsh's first meeting to result in no change to interest rates, with a rate cut seen as highly unlikely.
Looking ahead, the Fed's policy path will heavily depend on incoming inflation data and the evolution of the geopolitical situation. Morgan Stanley warns that due to the Iran conflict, tariff adjustments, and lagging effects from housing inflation, U.S. inflation could peak in May-June, with little significant decline in the near term.
In this context, Fed policy is expected to maintain a hawkish tilt. Holding rates steady at the June meeting remains the most likely outcome, while the option to hike rates has shifted from a "potential possibility" to a "ready-to-deploy" tool. Should subsequent inflation data continue to exceed expectations, the Fed could potentially initiate a rate-hiking cycle in the second half of the year. Conversely, if geopolitical tensions ease, leading to a decline in energy prices and clear signals of cooling inflation, policy could maintain a neutral stance, though rate cuts would remain off the table for the foreseeable future.
For markets, the Fed's "hawkish bias" has become a core pricing factor. Future focus will be on marginal changes in inflation data and the geopolitical landscape, as well as the final policy direction set by Chair Warsh after he assumes his role.
In summary, while strong employment data and rising inflation might seem to point toward rate hikes as an obvious conclusion, it's important to note that inflation is currently driven largely by oil prices. The WTI crude futures curve remains in backwardation, suggesting prices are expected to decline over time. Former Chair Powell has also stated that war-related inflation tends to be transitory. Regarding employment, growth in low-wage jobs alongside significant layoffs in the tech sector and reductions in high-wage employment suggests underlying weaknesses in the labor market.
Therefore, while interest rate futures currently price in a more than 50% probability of a hike by the end of 2027, these expectations can change rapidly. For instance, a de-escalation between the U.S. and Iran could cause rate hike expectations to vanish quickly. So, while the possibility of rate cuts has been ruled out for now, the need for immediate rate hikes may not yet be present. Interest rate futures indicate a 70% probability that the Fed will keep the federal funds rate unchanged after its next two FOMC meetings through September.
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