By Federal Reserve officials at their most recent policy meeting signaled growing concern that persistent inflation tied to the Iran war could eventually force the central bank to raise interest rates, according to minutes released Wednesday.
The Federal Open Market Committee voted at its April 28-29 meeting to keep its benchmark federal funds rate unchanged in a range of 3.5% to 3.75%.
However, the meeting exposed deep divisions among policymakers over the future direction of monetary policy and whether the Fed should continue signaling a bias toward eventual rate cuts.
The minutes showed that while some officials still believed rate reductions would become appropriate if inflation moved closer to the Fed’s 2% target or if the labor market weakened,
“A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent.“
Officials debate easing bias
The meeting featured four dissents, the highest number since 1992, with three regional Fed presidents objecting to language in the post-meeting statement that implied the next move in rates would likely be lower.
Those policymakers supported keeping rates steady but opposed references to “additional adjustments” in the statement, language widely interpreted by markets as signaling an easing bias.
According to the minutes, “many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions.“
The debate reflected mounting concerns over inflation pressures stemming from the Iran conflict, particularly through rising energy prices and broader supply disruptions.
Officials broadly agreed the war would have “significant implications” for the Fed’s dual mandate of stable prices and maximum employment, though they differed on how long the inflationary effects would last.
“The vast majority of participants noted an increased risk that inflation would take longer to return to the Committee’s 2 percent objective than they had previously expected,” the minutes stated.
Inflation had been moving closer to the Fed’s target through 2025 and early 2026, but the war-driven surge in energy prices has complicated the outlook. While policymakers often view oil shocks as temporary, core inflation measures excluding food and energy have also moved higher.
Goldman Sachs expects the Fed’s preferred inflation gauge to show an annual rate of 3.3% when the next reading is released.
Markets price in potential hikes
Financial markets have increasingly shifted toward expecting tighter monetary policy rather than rate cuts.
Futures tied to the federal funds rate on Tuesday implied a strong possibility of a 25-basis-point increase by late 2026 or early 2027.
Recent economic data has reinforced concerns about inflation persistence.
Officials noted stronger-than-expected employment figures and elevated price pressures, while describing the labor market as stable but vulnerable.
Treasury yields have also remained elevated amid the inflation concerns and geopolitical uncertainty tied to the Strait of Hormuz remaining effectively blocked.
Warsh prepares to take over Fed leadership
The April meeting marked the final FOMC gathering chaired by Jerome Powell, who is stepping down as Fed chair while remaining on the Board of Governors for at least part of his remaining term.
Former Fed Governor Kevin Warsh is set to be sworn in on Friday after being selected by President Donald Trump.
Trump publicly stated that support for lower interest rates was an important factor in his decision.
Warsh told lawmakers during his confirmation hearing that Trump had not pressured him to cut rates and pledged to maintain the independence of the central bank.
The minutes also revealed discussion about expanding the duration of Fed swap lines.
“A few participants commented on the possibility that the committee could consider extending the terms of swap lines beyond one year, noting that a longer extension would be beneficial for financial stability.”
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