The Federal Reserve meeting minutes hinted at an interest rate hike, but US Treasury yields fell instead of rising.
2026-05-21 09:11:32
The minutes of the Federal Reserve's April meeting, released on May 20 local time, showed that most Fed officials anticipated at the most recent meeting that it would be necessary to raise interest rates if the US-Iran conflict continued to exacerbate inflationary pressures. Although the Federal Open Market Committee again voted to maintain the target range for the benchmark interest rate at 3.5%-3.75%, this meeting saw four dissenting votes, the most since 1992, indicating a significant increase in internal disagreement within the committee regarding policy direction.
The core of the debate lies in the extent of the impact of the war on prices and how this impact will translate into monetary policy. Officials disagree on the duration of the conflict's effects and on whether the post-meeting statement should continue to reflect the biased wording that "a rate cut is the more likely next step."
The minutes noted that while several participants said it would be appropriate to cut interest rates when inflation was clearly returning to the 2% target or the labor market was weakening, "most participants stressed that if inflation remained above 2%, further policy tightening might be necessary."
Three of the four dissenting votes came from regional Federal Reserve presidents. They argued that policymakers should retain the option to raise interest rates amid soaring inflation. The three presidents agreed to keep the federal funds rate at its current level but opposed including wording in the statement that mentions "additional adjustments"—a phrase widely interpreted as implying a rate cut as the next step.
The minutes noted that "many participants indicated they preferred the removal of language from the post-meeting statement that suggested a dovish bias in the Committee's future interest rate decisions." However, according to the Federal Reserve's conventions, "many" does not constitute a majority, so the wording was ultimately retained.
Officials generally agreed that the Iranian conflict would have a “significant impact” on the Federal Reserve’s dual mandate of pursuing full employment and price stability, although they were still debating the duration of its inflationary effects. The minutes explicitly stated: “The vast majority of participants noted that it may take longer than they had previously expected for inflation to return to the 2% target.”
According to the latest data from the CME Group FedWatch tool, the market's expectation of a Fed rate hike in December has slightly decreased to 53% from 61% on Tuesday.
Brian Jacobson, chief economic strategist at Annex Wealth Management, said that given the uncertainties surrounding oil prices, tariffs, and AI, "the Fed's forward guidance is more like speculation and not something to be taken too seriously."
This meeting comes as Jerome Powell is chairing the Federal Open Market Committee for the last time. Inflationary pressures persist due to the war and other factors, and officials remain cautious about the policy outlook. Now, former Governor Kevin Warsh has taken over as Fed Chairman. President Trump has made it clear that he expects the Fed to cut interest rates. However, market pricing points to a more likely rate hike by the committee—perhaps in late 2026 or early 2027.
The meeting minutes also revealed a noteworthy detail: Powell chose to remain as a Federal Reserve governor. He has two years remaining in his term and stated in April that he would remain in office "for an indefinite period," while reiterating his previous statement that he would remain until "this investigation is completely concluded." No other Federal Reserve chairman in nearly 80 years has continued to serve as a governor after leaving office.
Inflation consistently approached the Federal Reserve's 2% target in 2025 and early 2026. However, the US-Iran conflict altered this dynamic, with soaring energy prices pushing most inflation indicators above 3%. Policymakers typically view supply shocks such as soaring oil prices as temporary factors. But even core inflation, excluding food and energy, continues to climb. Goldman Sachs projects the Fed's key inflation forecast will reach an annualized rate of 3.3% in April.
Therefore, Walsh's challenge is to convince his colleagues that AI-driven productivity gains will have an anti-inflationary effect and offset the short-term shock of rising energy costs.
In summary, the minutes of the Fed's April meeting revealed a clearly divided committee: most officials were prepared to raise interest rates given persistently high inflation, but the statement retained wording leaning towards rate cuts to balance positions. The energy shock triggered by the US-Iran conflict is reshaping the inflation outlook, with the vast majority of officials believing it will take longer for inflation to return to the 2% target. Against this backdrop, new Chairman Warsh faces the dual pressures of rising expectations for rate hikes and Trump's demands for rate cuts, while Powell's decision to remain on the board adds new variables to the internal power struggle within the Fed. The market will closely watch Warsh's first public statement since taking office and the June FOMC meeting for true signals on policy direction.
Following the release of these hawkish meeting minutes, the market responded in a seemingly contradictory manner. Instead of rising, US Treasury yields fell, with the 10-year yield dropping by about 8-9 basis points to around 4.58%, and the 2-year yield falling by about 7 basis points to 4.05%.
Why did the market ignore the hawkish signals in the minutes? The core reason is that expectations of geopolitical easing temporarily outweighed concerns about interest rate hikes.
On the same day the minutes were released, international oil prices plummeted. WTI crude oil futures fell 5.66% to settle at $98.26 a barrel, breaking below the psychological barrier of $100; Brent crude oil futures fell 5.63% to $105.02. The trigger for the oil price crash was the positive signals released in the US-Iran negotiations—Trump stated that negotiations with Iran had entered the "final stage," and market expectations for the reopening of the Strait of Hormuz improved significantly.
Key points of contention: The impact of the US-Iran conflict on inflation and the debate over policy wording.
The core of the debate lies in the extent of the impact of the war on prices and how this impact will translate into monetary policy. Officials disagree on the duration of the conflict's effects and on whether the post-meeting statement should continue to reflect the biased wording that "a rate cut is the more likely next step."
The minutes noted that while several participants said it would be appropriate to cut interest rates when inflation was clearly returning to the 2% target or the labor market was weakening, "most participants stressed that if inflation remained above 2%, further policy tightening might be necessary."
Four dissenting votes: Regional Fed presidents opposed retaining the "accommodative bias" wording.
Three of the four dissenting votes came from regional Federal Reserve presidents. They argued that policymakers should retain the option to raise interest rates amid soaring inflation. The three presidents agreed to keep the federal funds rate at its current level but opposed including wording in the statement that mentions "additional adjustments"—a phrase widely interpreted as implying a rate cut as the next step.
The minutes noted that "many participants indicated they preferred the removal of language from the post-meeting statement that suggested a dovish bias in the Committee's future interest rate decisions." However, according to the Federal Reserve's conventions, "many" does not constitute a majority, so the wording was ultimately retained.
Consensus and Risks: The Iran Conflict Has a "Significant Impact" on the Dual Mission
Officials generally agreed that the Iranian conflict would have a “significant impact” on the Federal Reserve’s dual mandate of pursuing full employment and price stability, although they were still debating the duration of its inflationary effects. The minutes explicitly stated: “The vast majority of participants noted that it may take longer than they had previously expected for inflation to return to the 2% target.”
According to the latest data from the CME Group FedWatch tool, the market's expectation of a Fed rate hike in December has slightly decreased to 53% from 61% on Tuesday.
Brian Jacobson, chief economic strategist at Annex Wealth Management, said that given the uncertainties surrounding oil prices, tariffs, and AI, "the Fed's forward guidance is more like speculation and not something to be taken too seriously."
Warsh's Challenge: Taking over from Powell, facing a double whammy of expected interest rate hikes and political pressure.
This meeting comes as Jerome Powell is chairing the Federal Open Market Committee for the last time. Inflationary pressures persist due to the war and other factors, and officials remain cautious about the policy outlook. Now, former Governor Kevin Warsh has taken over as Fed Chairman. President Trump has made it clear that he expects the Fed to cut interest rates. However, market pricing points to a more likely rate hike by the committee—perhaps in late 2026 or early 2027.
The meeting minutes also revealed a noteworthy detail: Powell chose to remain as a Federal Reserve governor. He has two years remaining in his term and stated in April that he would remain in office "for an indefinite period," while reiterating his previous statement that he would remain until "this investigation is completely concluded." No other Federal Reserve chairman in nearly 80 years has continued to serve as a governor after leaving office.
Inflationary Background and Warsh's Argument
Inflation consistently approached the Federal Reserve's 2% target in 2025 and early 2026. However, the US-Iran conflict altered this dynamic, with soaring energy prices pushing most inflation indicators above 3%. Policymakers typically view supply shocks such as soaring oil prices as temporary factors. But even core inflation, excluding food and energy, continues to climb. Goldman Sachs projects the Fed's key inflation forecast will reach an annualized rate of 3.3% in April.
Therefore, Walsh's challenge is to convince his colleagues that AI-driven productivity gains will have an anti-inflationary effect and offset the short-term shock of rising energy costs.
Policy disagreements intensified, and Warsh's first test in office was the combined pressure of interest rate hike expectations and inflationary pressures.
In summary, the minutes of the Fed's April meeting revealed a clearly divided committee: most officials were prepared to raise interest rates given persistently high inflation, but the statement retained wording leaning towards rate cuts to balance positions. The energy shock triggered by the US-Iran conflict is reshaping the inflation outlook, with the vast majority of officials believing it will take longer for inflation to return to the 2% target. Against this backdrop, new Chairman Warsh faces the dual pressures of rising expectations for rate hikes and Trump's demands for rate cuts, while Powell's decision to remain on the board adds new variables to the internal power struggle within the Fed. The market will closely watch Warsh's first public statement since taking office and the June FOMC meeting for true signals on policy direction.
US Treasury yields fell
Following the release of these hawkish meeting minutes, the market responded in a seemingly contradictory manner. Instead of rising, US Treasury yields fell, with the 10-year yield dropping by about 8-9 basis points to around 4.58%, and the 2-year yield falling by about 7 basis points to 4.05%.
Why did the market ignore the hawkish signals in the minutes? The core reason is that expectations of geopolitical easing temporarily outweighed concerns about interest rate hikes.
On the same day the minutes were released, international oil prices plummeted. WTI crude oil futures fell 5.66% to settle at $98.26 a barrel, breaking below the psychological barrier of $100; Brent crude oil futures fell 5.63% to $105.02. The trigger for the oil price crash was the positive signals released in the US-Iran negotiations—Trump stated that negotiations with Iran had entered the "final stage," and market expectations for the reopening of the Strait of Hormuz improved significantly.
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