By Nick Timiraos
Federal Reserve officials all but retired the question that had dominated their debates for the past two years -- whether to cut interest rates -- and began more seriously at their meeting last month to weigh the opposite: whether to raise them.
"A majority of participants highlighted...that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%," according to the minutes of the April policy meeting, released Wednesday.
The minutes of Jerome Powell's final meeting as Fed chair underscored how the Middle East conflict has reshaped the outlook on the rate-setting committee that Kevin Warsh will lead after he is sworn in at the White House on Friday. The central bank's next policy meeting is June 16-17.
In the three weeks since the meeting, investors have upped bets that the Fed's next move is more likely to be an increase rather than a cut. Before the release of the minutes, the probability of at least one quarter-point rate hike by the end of this year had reached nearly 50% in interest-rate futures markets, according to CME Group.
Fed officials voted last month to hold rates steady. But three Fed presidents objected, not to the rate decision itself, but to the wording that retained the so-called easing bias in the Fed's statement. That language indicates that the Fed's next move is more likely to be a cut than an increase.
The minutes showed that "many" officials would have preferred removing the easing bias, a sign of broader support than the three formal dissents suggested. The additional backing could have come from voting members who wanted the language gone but weren't prepared to dissent over it, or from bank presidents who don't have a vote this year.
There are 19 officials who participate in the meetings of the Federal Open Market Committee: 12 bank presidents and seven governors. Only 12 policymakers -- the governors and a rotating group of five presidents -- have a vote at any meeting.
Powell, at his press conference after the meeting, offered little substantive defense of the committee's decision to keep the easing language. He framed it instead as a matter of process: changing the language is itself a signal, and the Fed preferred not to move until confident the shift would stick.
The immediate trigger for the rethink by both the central bank and investors has been the war in Iran, which sent energy prices climbing and threatened to keep inflation lodged above the Fed's 2% target.
U.S. and Israeli strikes on Iran and the ensuing closure of the Strait of Hormuz have kept energy prices elevated. A weekslong stalemate that followed last month's cease-fire has pushed out the timeline for oil markets to normalize -- leaving markets to anticipate inflation that stays higher for longer.
Long-term interest rates have climbed over the past several weeks as investors concluded the Fed might make the type of pivot hinted at in Wednesday's written account.
Compounding the shift have been signs of a steadier labor market and a rethink of the AI boom. Once expected to push down on inflation by lifting productivity, it increasingly looks like a near-term source of demand and overheating instead -- as hundreds of billions of dollars in data-center construction and the wealth effect from soaring tech valuations stoke spending faster than AI has cut costs.
Yields on the 10-year Treasury note have risen from a recent low of just below 4% in March to around 4.6% in recent days, a move that has rippled into mortgage and corporate borrowing costs.
"A lot of what's driving" long-term rates "is a repricing of the Fed path -- away from cuts and toward hikes," said James Egelhof, chief U.S. economist at BNP Paribas. Because the Fed has held its rate steady as inflation climbed in recent months, the inflation-adjusted rate has drifted lower -- the practical equivalent, he said, of the Fed having cut several times without intending to, easing into an economy more resilient than officials feared.
Philadelphia Fed President Anna Paulson said in a speech Tuesday that while she didn't anticipate any need to change rates anytime soon, she described as healthy how markets had given more weight to scenarios in which the Fed shifts to raising rates.
Her views track the evolution of the broad center of the rate-setting committee under Powell. In January she had expected cuts later this year, reasoning that tariff-driven price increases would fully subside by year-end, bringing inflation close to the Fed's 2% target.
The Trump administration says the spike will be temporary, sparing the economy the more damaging scenario in which a one-time jump in energy prices feeds into wages and the prices of other goods and services. Those so-called second-round effects can entrench inflation and require stiffer rate increases to reduce inflation.
Treasury Secretary Scott Bessent maintained that underlying inflation had been declining before the Iran conflict and would resume that pattern after one or two more months of higher prices. That would leave Warsh "in a very good position," Bessent said on CNBC last week.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
May 20, 2026 14:28 ET (18:28 GMT)
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