Federal Reserve minutes signal hikes

Federal Reserve officials used their April meeting to discuss a possibility investors had largely treated as remote a few months ago: that the next move in U.S. interest rates could be up, not down. Minutes of the April 28-29 Federal Open Market Committee meeting, released on May 20, showed officials were more concerned that inflation could stay above target, with higher energy prices and the effects of the Middle East conflict adding to those worries. The record said the staff raised its inflation forecast for 2026 from the March meeting, citing incoming data, energy costs and the conflict’s expected effect on consumer prices. By Thursday, futures markets were assigning higher odds to a rate increase before year-end. ### What in the minutes changed the tone? The April 28-29 minutes said a majority of policymakers warned the Fed would likely need to consider raising rates if inflation remained persistently above its 2% target. The minutes also said “many” officials favored dropping an easing bias and signaling that the next move could be an increase, according to Bloomberg’s account of the release. Federal Reserve staff said in the minutes that this year’s inflation forecast was revised higher than the one prepared for the March meeting. The document attributed that change to incoming data, higher energy prices and other effects of the Middle East conflict expected to feed into consumer price inflation. ### Where did energy prices and the Iran war enter the debate? (bloomberg.com) Chair Jerome Powell said on April 29 that inflation had “moved up and is elevated,” in part because of the recent increase in global energy prices. He also said developments in the Middle East were contributing to a high level of uncertainty about the outlook. The minutes did not frame the conflict as the only inflation risk. (federalreserve.gov) The document said higher energy prices and broader incoming data both contributed to a firmer inflation outlook, giving officials another reason to keep policy restrictive. ### How did markets react? By Thursday afternoon, fed-funds futures traders were pricing more than a 42% chance of at least one quarter-point rate hike by December, according to MarketWatch, citing market pricing. (federalreserve.gov) CME says its FedWatch tool measures the probabilities of policy changes implied by 30-day fed funds futures. (federalreserve.gov) Long-dated Treasury yields also moved higher as investors adjusted to the prospect of rates staying restrictive for longer. The 30-year Treasury yield reached its highest level since 2007, according to the reporting cited in the source briefings, while the 10-year yield also rose. (marketwatch.com) ### Why does this matter for Kevin Warsh? Kevin Warsh is set to inherit a Federal Reserve facing pressure from two directions, according to the source briefings: political demands for easier money and a new burst of inflation pressure. The minutes showed that inflation concerns were already broadening inside the Fed before he takes over. (marketwatch.com) The practical issue for the next chair is that the Fed left rates unchanged on April 29 while describing inflation as elevated. That means the next leadership phase begins with policy already on hold and with officials openly discussing the conditions that could justify a hike. ### What comes next for the Fed? The Federal Reserve said the minutes released on May 20 covered information available at the time of the April meeting, not subsequent developments. (bloomberg.com) That leaves investors focused on new inflation data, energy markets and any further deterioration in the Middle East before the next decision. The next FOMC meeting is scheduled for June 16-17, with the policy decision due on June 17. (federalreserve.gov) Until then, traders are likely to keep watching CME FedWatch probabilities and Treasury yields for signs that the market is moving closer to pricing a hike as the Fed’s base case rather than its contingency. (cmegroup.com) (federalreserve.gov)