FOMC minutes show a Fed worried divided on the easing bias, increasingly worried about the Iran war's impact on inflation

• The Fed cited the Middle East conflict as a key driver of asset prices, with near-term inflation expectations rising due to elevated crude oil prices, though longer-term expectations remain anchored near the 2% target through 2027.
• Staff forecast inflation to remain elevated through first half of the year before declining to near 2% by end of 2026, but warned of upside risks given five years of above-target inflation and potential for price pressures to become embedded.
• Stephen Miran dissented in favor of a 25 basis point cut citing overly restrictive policy, while Hammack, Kashkari, and Logan opposed the easing bias. Markets priced in only 30% probability of rate hikes by Q1 2027, with cuts now expected in late 2026 or early 2027.

Summary

The April 28-29 FOMC meeting minutes revealed a Federal Reserve deeply divided on monetary policy direction, with growing concerns about inflation stemming from the Iran conflict. While the committee voted to maintain the current federal funds rate, dissent was notable: one member favored a 25-basis-point cut, while three members (Hammack, Kashkari, and Logan) opposed the easing bias language in the statement.

Key Economic Concerns:

The Fed staff noted that the Middle East conflict remained a primary driver of asset prices, with crude oil futures elevated compared to March levels. Near-term inflation expectations rose, though longer-term expectations remained anchored near the 2% target. The staff's 2026 inflation forecast increased due to higher energy prices and conflict-related effects, though inflation is projected to approach 2% by end of next year.

Labor Market Assessment:

The unemployment rate held steady with low job gains. Most participants judged labor market risks tilted to the downside, though conditions appeared to be stabilizing. Real GDP projections slightly strengthened, supported by favorable financial conditions and AI-related capital spending.

Policy Outlook:

Market participants anticipated little rate change in 2025, with approximately 30% probability of a rate hike by Q1 2027. A majority of FOMC members preferred removing easing bias language, with several noting that policy firming might be necessary if inflation persists above 2%. Conversely, several participants suggested rate cuts could be appropriate if disinflation resumes or labor market weakness emerges.

Market Reaction:

Gold showed minimal response, trading at $4,537.10, up 1.23%.

The minutes underscore heightened uncertainty around geopolitical risks and their inflationary impact on monetary policy decisions.