Fed officials grow more open to rate hike as Iran war fuels inflation fears
Synopsis
Minutes from the Federal Reserve’s April meeting showed a growing number of policymakers are considering further rate hikes as inflation risks tied to the Iran war continue to build.
Federal Reserve policymakers became more concerned about persistent inflation during their April meeting, with a growing number indicating they could support further interest rate hikes if price pressures fail to ease, according to minutes released on Wednesday. The discussions highlighted mounting worries over inflation linked to the ongoing Iran war, rising energy prices and broader cost pressures across the economy, signalling that incoming Fed Chair Kevin Warsh may take over a more hawkish central bank than previously expected.
Key highlights
- Fed minutes showed more policymakers are open to raising rates if inflation stays elevated
- Officials warned the Iran war is increasing energy-driven inflation pressures
- Several members wanted to remove language suggesting future rate cuts
- Incoming Fed Chair Kevin Warsh is set to inherit a more hawkish central bank
- Bond markets are increasingly pricing in the possibility of higher interest rates
What happened
Minutes from the Federal Open Market Committee’s April 28–29 meeting showed that a majority of policymakers believed “some policy firming would likely become appropriate” if inflation remained above the Fed’s 2% target.
Several officials also preferred removing wording in the post-meeting statement that implied the central bank still retained a bias toward future rate cuts.
The minutes noted that policymakers generally believed rates would need to remain higher for longer, with a “vast majority” warning inflation risks had increased and could take longer than expected to return to target levels.
At the same time, officials broadly viewed labour market conditions as stable, reducing the urgency for monetary easing.
Why this matters
The minutes underscore how sharply the Fed’s policy outlook has shifted since the escalation of the Iran conflict earlier this year.
Oil prices have surged more than 50% since the U.S.-Israeli strikes on Iran began in late February, increasing inflation pressures across transport, manufacturing and consumer goods.
The shift in tone also complicates expectations for incoming Fed Chair Kevin Warsh, who previously signalled openness toward lower rates before the conflict intensified inflation concerns.
Markets are now increasingly pricing in the possibility that the Fed may need to raise rates again rather than cut them in 2026.
Division inside the Fed
The April meeting was one of the most divided in decades, with four policymakers dissenting from the decision to keep rates unchanged at 3.50% to 3.75%.
Governor Stephen Miran dissented in favour of a rate cut, while three other officials objected to language suggesting future easing remained possible.
According to the minutes, more officials than at previous meetings now believe a rate hike could become necessary if inflation fails to moderate.
Oxford Economics chief global economist Ryan Sweet said building consensus around any rate move could prove difficult in the near term.
“Though there will be a new Fed chair at the June meeting, building a consensus to move rates in either direction will be a difficult task anytime soon,” Sweet said.
Markets react to hawkish signals
Financial markets have increasingly adjusted to the prospect of tighter monetary policy.
The yield on the two-year US Treasury note, often viewed as a proxy for Fed expectations, has climbed from below 3.40% before the Iran conflict to above 4.10%, its highest level in 15 months.
A recent Reuters poll also showed economists sharply reducing expectations for rate cuts this year, with fewer than half now forecasting a reduction by December.
Around half of respondents expect rates to remain unchanged through 2026, while some now anticipate at least one additional hike.
What happens next
Kevin Warsh is expected to chair his first Federal Reserve meeting on June 16–17 following Jerome Powell’s departure after eight years leading the central bank.
While markets currently expect rates to remain unchanged at that meeting, investors will closely monitor incoming inflation, employment and energy market data for signs of whether the Fed may ultimately tighten policy further.
The trajectory of the Iran conflict and global oil prices is also likely to remain a major factor shaping the Fed’s outlook in the months ahead.
FAQs
Q1: Why are Fed officials discussing another rate hike?
Federal Reserve officials are worried inflation could remain elevated for longer, particularly due to rising energy costs linked to the Iran war.
Q2: Did the Fed raise interest rates at the April meeting?
No. The Federal Reserve kept rates unchanged between 3.50% and 3.75%, although several policymakers signalled support for tighter policy if inflation worsens.
Q3: How has the Iran war affected inflation?
The conflict has driven oil prices sharply higher, increasing costs across fuel, transport and goods, which has added to inflation pressures.
Q4: Who is the new Fed Chair?
Kevin Warsh is set to become the next Federal Reserve Chair and will oversee his first policy meeting in June 2026.
Q5: Are markets still expecting rate cuts this year?
Expectations for rate cuts have fallen considerably, with many economists now forecasting no changes or even potential rate hikes later this year.
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I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
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