A record of the April meeting, Jerome H.
Powell’s last as chair, underscored the extent to which the war with Iran has upended
the economic outlook.
·
Minutes
from the April meeting of the Federal Reserve showed that a majority of
officials believed higher interest rates may become necessary if inflation
remains elevated.
·
Policymakers
indicated that:
o “some policy firming would likely become
appropriate”
if
inflation continues to stay above the Fed’s 2% target.
·
The
meeting highlighted growing concern over inflation pressures linked to:
o the Iran conflict,
o rising energy prices,
o and persistent economic uncertainty.
·
The
Fed kept interest rates unchanged at:
o 3.5% to 3.75% during the April meeting.
·
The
minutes revealed one of the most divided policy meetings in decades.
·
Three
members of the:
o Federal Open Market Committee
voted
against language suggesting an “easing bias” in future policy guidance.
·
These
members wanted the Fed to explicitly state that:
o the next policy move could be either a
rate hike or a rate cut.
·
Many
officials supported removing language that implied future rate reductions were
more likely.
·
Policymakers
now expect rates may need to remain elevated:
o “for longer than previously anticipated”.
·
At the
beginning of 2026, most Fed officials had expected inflation to ease enough to
allow rate cuts later in the year.
·
However,
the energy shock caused by the Iran war has pushed inflation further away from
the Fed’s target.
·
Officials
also expressed concern that prolonged inflation could:
o affect wage demands,
o alter business pricing behaviour,
o and create a more persistent inflation
cycle.
·
Despite
inflation concerns, Fed officials appeared somewhat more optimistic about
economic growth due to:
o stable unemployment,
o resilient consumer spending,
o and continued business investment.
·
Jerome
Powell chaired his final Fed meeting in April.
·
Kevin
Warsh is scheduled to be sworn in as the new Fed Chair on Friday.
·
Mr.
Powell will remain a Fed governor even after stepping down as Chair.
·
Financial
markets are now increasingly pricing in:
o a possible Fed rate increase in early
2027.
·
US
Treasury bond yields have risen sharply, with the:
o 30-year Treasury yield briefly reaching
its highest level since 2007.
·
Higher
bond yields indicate investor concern over:
o inflation,
o borrowing costs,
o and future monetary tightening.
·
Donald
Trump had previously pushed for lower borrowing costs but recently said he
would allow Mr. Warsh to act independently.
·
Mr.
Trump described Mr. Warsh as:
o “a very talented guy” who would “do a good
job.”
A
majority of officials at the Federal Reserve thought higher interest rates might
become necessary to combat resurgent inflation, according to minutes from the central
bank’s April meeting.
The
record of the most recent gathering, released on Wednesday, underscored the extent
to which the war with Iran has upended the economic outlook and the policy options
in front of a central bank that is on the cusp of a leadership transition. April’s
gathering was Jerome H. Powell’s last as chair. On Friday, his replacement, Kevin
M. Warsh, is set to be sworn in at the White House.
At
the start of 2026, most Fed officials saw a path to lower rates this year based
on their expectation that inflation would decelerate as the impact of President
Trump’s tariffs faded.
But
the energy shock stemming from the war has pushed inflation further away from the
Fed’s 2 percent target, stoking concerns about a more persistent problem just as
the labor market has stabilized. This backdrop has dimmed
the prospects of any immediate relief in borrowing costs, with traders in federal
funds futures markets now penciling in a rate increase
in early 2027.
According
to the minutes, a majority of the participants highlighted that “some policy firming
would likely become appropriate if inflation were to continue to run persistently
above 2 percent.”
April’s
meeting was one of the most divisive in decades. Most policymakers agreed with the
Fed’s decision to hold rates steady at a range of 3.5 percent to 3.75 percent. But
three members of the policy-setting Federal Open Market Committee voted against
what they described as an “easing bias” in the central bank’s policy statement.
They wanted the Fed to make clear that the next move could just as likely be a rate
increase as a rate reduction.
The
minutes showed mounting support for that shift across the broader group of 19 policymakers,
noting that “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.”
For
now, however, most officials appeared comfortable holding rates steady “for longer
than previously anticipated” given the recent string of elevated inflation reports
and uncertainty about when the war might end. They also appeared to turn more upbeat
about the growth outlook in light of recent evidence that the unemployment rate
had stabilized, business investment had remained robust and consumer spending had
stayed resilient.
A
vast majority of officials, according to the minutes, appeared attuned to the possibility
that it would take longer for inflation to fall back to the 2 percent target, with
several people warning about that overshoot eventually impacting not only how employers
set prices but also the wages that employees demand. That kind of spillover could
result in a much more persistent inflation problem that would be harder to root
out.
Mr.
Powell will remain one of the Fed’s 19 officials weighing in on the policy outlook
even after he steps down as chair, having decided to stay on as a governor because
of his concerns about Mr. Trump’s attempts to encroach on the Fed’s independence.
That
leaves Mr. Warsh to allay concerns about rising inflation risks because of the war,
while forging consensus among his new colleagues about the path forward for policy.
U.S. government bond yields have shot higher in the past week, indicating a drop
in price. The yield on 30-year Treasuries at one point this week traded at its highest
level since 2007.
This
backdrop is likely to deny Mr. Trump the lower borrowing costs he wants and has
said he expected Mr. Warsh to deliver.
Mr.
Trump appeared to ease up on his demands ahead of Mr. Warsh’s swearing-in ceremony,
saying this week that he would “let him do what he wants to do.”
“He’s
a very talented guy — he’s going to be fine, he’s going to do a good job,” Mr. Trump
said of Mr. Warsh.