Federal Reserve officials are increasingly concerned about inflation being exacerbated by the ongoing Iran war, with a growing number now open to the possibility of raising interest rates. This development signals that incoming Chair Kevin Warsh will inherit a more hawkish group of central bankers. Minutes from the April 28-29 Federal Open Market Committee (FOMC) meeting revealed that a majority of policymakers felt “some policy firming would likely become appropriate” if inflation remains persistently above the central bank’s 2% target. Many participants indicated a preference for removing language from the post-meeting statement that had suggested an easing bias, highlighting a significant shift in sentiment.
The primary driver for this hawkish drift is escalating inflation pressures, significantly aggravated by the US-Israel-led war against Iran. The nearly three-month-old conflict has driven up energy prices and fanned broader cost pressures across various goods and services. A vast majority of policymakers noted an increased risk that inflation would take longer than anticipated to return to their 2% goal, even while generally expecting stable labour market conditions in the near term. This marked the second consecutive meeting where more policymakers considered a rate hike appropriate if inflation persisted above target.
The FOMC left its short-term policy rate unchanged in a range of 3.50% to 3.75%. However, four policymakers dissented—the most since 1992. These dissents were mixed: one official favoured a rate cut, while three opposed the continued use of language implying potential future rate reductions, citing inflation well above target and a resilient employment market. Global bond markets now increasingly reflect convictions that central banks will lift rates to counter war-induced inflation, with recent polls showing a significant shift among economists away from rate cut expectations this year, with fewer than 50% now projecting a reduction by December.
