Fed Minutes Show More Policymakers Were Prepared to Lay Groundwork for Rate Hike

The Federal Reserve's most closely watched document in years landed Wednesday, and its message was unambiguous: the era of easy money is not just on hold — it may be reversing. Federal Reserve officials' concerns about inflation being stoked by the Iran war intensified last month, with a growing number of them saying the central bank should lay the groundwork for a possible rate hike — a sign that incoming Chair Kevin Warsh will inherit an increasingly hawkish crew of central bankers. A "majority" of Federal Reserve officials believed the central bank could raise interest rates if inflation stays high, according to the minutes from the central bank's April 28-29 policy meeting.

The Most Divided Fed Meeting Since 1992

The FOMC again voted to keep its benchmark rate targeted between 3.5% and 3.75%, but the meeting featured four "no" votes — the most since 1992 — and an apparently heightened level of disagreement about where policy should go. The language inside the minutes was notably more aggressive than anything published under Jerome Powell's recent tenure. "A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%," the minutes stated. Going further, "many participants indicated that they would have preferred removing the language from the postmeeting statement that suggested an easing bias regarding the likely direction of the Committee's future interest rate decisions." In plain English: a large and growing bloc of Fed officials no longer wants the market to believe rates are heading lower.

April's meeting — the last chaired by Jerome Powell — was the second in a row to feature more policymakers feeling a rate hike could be appropriate if inflation remained above target than at the immediately prior policy gathering. The trend is accelerating, not plateauing. For the full text of the released minutes and all FOMC documentation, the Federal Reserve's official website publishes every meeting's minutes, statements, and projections in their entirety.

The Iran War Is the Central Villain

The catalyst for the Fed's hawkish shift is explicit and singular. The main culprit for the further hawkish drift among policymakers was — again — the inflation pressures aggravated by the U.S.-Israel-led war against Iran. The nearly three-month-old conflict has driven up energy prices and fanned cost pressures across a widening array of goods and services.

The personal consumption expenditures (PCE) index, the Fed's preferred inflation gauge, was estimated at 3.5% in March — nearly double the Fed's 2% target. Headline CPI rose 0.9% from February to March and was 3.3% higher year over year — the highest annual increase since May 2024 — driven directly by the oil price surge triggered by the effective closure of the Strait of Hormuz. Several members warned that elevated oil prices and tariffs could eventually cause inflation pressures to become more deeply embedded across the broader economy, raising the spectre that what began as a supply shock could harden into a structural inflation problem requiring active monetary tightening to resolve.

Markets Have Already Repriced for a Hike

Bond and futures markets are not waiting for the Fed to act before adjusting. The yield on the 2-year U.S. Treasury note — a proxy for Fed policy expectations — has shot up sharply since the war began, as U.S. and global bond markets increasingly reflect a conviction that the Fed and other top central banks will be lifting interest rates before long to lean against war-induced inflation.

The market's view of the interest rate outlook has shifted to signal possible rate hikes before year-end, with the CME FedWatch tool showing a 51% probability that rates will remain at their current level of 3.5%–3.75% through the Fed's December meeting — and a meaningful probability of a hike embedded in the December and early 2027 pricing. Put differently: markets have already moved from pricing rate cuts to pricing rate hikes as the modal scenario for late 2026 and early 2027.

Kevin Warsh Walks Into a Fight

The timing of the minutes' release — just days before Kevin Warsh is sworn in as Fed Chair — is not lost on anyone on Wall Street. Warsh will convene his first Fed meeting on June 16–17 with no prospect seen for a change in rates, and certainly not a cut. Two blocs of Fed officials await him: a growing one wary of inflation from the Iran war and opposed to any talk of future rate cuts, and a diminishing one still leaning toward lowering borrowing costs.

Warsh, who says he relishes a "good family fight" and has himself laid out arguments in favour of lower interest rates, will be sworn in as Fed Chair at a White House ceremony hosted by President Donald Trump — who appointed him and has been explicit in his demands for deep rate cuts. The central tension of Warsh's tenure is now crystallising before he has even taken his seat: a president demanding cuts, markets pricing hikes, and a majority of his own committee prepared to tighten if inflation does not cool. It may indeed be a very good fight.

What Comes Next: The June Meeting Is Critical

The June 16–17 FOMC meeting — Warsh's debut — will set the tone for his entire chairmanship. With no rate change expected at that meeting, the critical deliverables will be the updated Summary of Economic Projections (the "dot plot") and Warsh's inaugural press conference. Any upward revision to the 2026 inflation forecast or a shift in the median dot toward a rate hike by year-end would represent a seismic signal for markets. For now, the April minutes have done their job: the Fed has officially put the financial world on notice that the next rate move may not be a cut.