Fed Minutes Suddenly Deliver Hawkish Signal! Four Dissenting Votes Mark Most Since 1992, Rate Hike Option Back on the Table

The Federal Reserve’s latest meeting minutes released Wednesday (May 20) show that most officials believe that if the Iran war continues to drive inflation higher, further rate hikes may become necessary in the future. Although the Federal Open Market Committee (FOMC) decided at the most recent meeting to keep the benchmark interest rate unchanged in the 3.5%-3.75% range, internal disagreements over the policy path have grown significantly.

This meeting saw four dissenting votes, the most since 1992, highlighting the increasingly complex policy challenges faced within the Federal Reserve amid Middle East conflicts, surging energy prices, and a resurgence of inflation risks.

Most officials believe: If inflation remains above 2%, further policy tightening may be needed

The minutes reveal that the main issue in this round of discussions is the impact of the Iran war on inflation and how these effects will be transmitted to monetary policy.

While some officials believe that if inflation clearly returns toward the 2% target or if the labor market weakens significantly, a rate cut might be appropriate in the future, the minutes also stress: "Most participants noted that if inflation remains persistently above 2%, further tightening of policy could be appropriate."

This indicates that the consensus within the Federal Reserve that the “next move is still a rate cut” is weakening.

The minutes also mention: "Many participants indicated they would have preferred to remove the post-meeting statement's references that implied a future policy bias toward easing."

However, in Federal Reserve parlance, "many" does not equal "majority;" therefore, the final statement still retained language regarding "further adjustments to interest rates." The market generally interprets this as leaving open the possibility of future rate cuts.

Four dissenting votes mark the highest since 1992

At this meeting, four officials cast dissenting votes, the highest number since 1992.

Among them, three dissenting votes came from regional Fed presidents. While they agreed to keep rates unchanged, they opposed retaining language in the statement implying a bias toward future rate cuts.

These officials believe that, amid the resurgence of inflation, the Federal Reserve should retain flexibility for further rate hikes rather than prematurely sending signals of easing to the market.

This disagreement also reflects significantly different assessments within the Fed regarding the current nature of inflation.

The minutes indicate that an overwhelming majority of officials believe the Iran war has significantly increased the risk of inflation re-accelerating.

The document notes: "An overwhelming majority of participants thought that the time needed for inflation to return to the 2% target may now be longer than previously expected."

With the Strait of Hormuz remaining restricted and international oil prices continuing to surge, energy prices have become an important driver of the current U.S. inflation rebound.

Currently, international oil prices have climbed back above $100, and several inflation indicators have also risen back above 3%.

Normally, the Federal Reserve tends to ignore short-term energy price spikes caused by supply shocks, but the situation is now becoming more complex.

Even core inflation, which excludes food and energy, has started trending higher once again.

Goldman Sachs expects the Fed’s preferred inflation measure—the core PCE price index—to show a year-on-year growth rate of 3.3% for April, with the relevant data to be released next week.

New Chairman Warsh faces major challenge

This meeting also had a special context: it was Jerome Powell’s last time presiding over an FOMC meeting.

Former Fed governor Kevin Warsh has officially taken over as the chairman of the Federal Reserve.

Trump ultimately chose Warsh after months of selection and made it clear he hopes the Federal Reserve can begin to cut rates.

However, current market pricing shows investors are increasingly inclined to believe that the Fed’s next move could be a rate hike, not a cut.

The interest rate futures market currently expects that the Federal Reserve could restart the rate hike cycle at the end of 2026 or early 2027.

One of Warsh’s biggest challenges will be convincing other officials that productivity gains driven by artificial intelligence can help contain inflation, offsetting the short-term pressures from rising energy prices.

Powell will remain on the Federal Reserve Board of Governors

Notably, despite stepping down as chairman, Powell will continue to serve on the Board of Governors of the Federal Reserve. His current term as a governor has two years remaining.

Powell stated this April that he would remain for “some time into the future” and would continue performing his duties “until this investigation is thoroughly concluded.”

In nearly 80 years of history, no other Federal Reserve chairman has remained on the Board after stepping down as chair.