Fed Turns Hawkish in a Month, Hints at Possibility of "Additional Policy Firming"

Return to 2% Inflation Expected to Take Longer
'Additional Policy Firming' Deemed Appropriate if Trend Persists
Significant Shift from March's Neutral Stance

The minutes of the April Federal Open Market Committee (FOMC) meeting, released by the U.S. Federal Reserve (Fed), revealed a shift in policy stance. While the dominant tone in the previous March meeting was dovish, stating that "a rate cut would be appropriate at the right time," the April minutes presented the opposite view.

This shift was driven by growing concerns that the surge in international oil prices and supply chain instability, stemming from the aftermath of the Iran war, could reignite inflation. As a result, the prospect of a rate cut within this year, which the market had anticipated, has become even more remote.

Phrases suggesting the possibility of tightening in the April FOMC meeting minutes. Fed

According to the April FOMC minutes, released on the 20th (local time), "A majority of participants saw increased risks that it will take longer than previously anticipated for inflation to return to the Fed's 2% target."

This reflects concerns that, in addition to the surge in oil prices caused by the Iran war, rising energy-related costs—including logistics, fertilizers, and airfare—could lead to broad-based price pressures.

Of particular note is the appearance of the phrase "additional policy firming" in the minutes. The minutes stated, "If inflation persistently exceeds 2%, it is likely that some additional policy firming will be appropriate." Given the Fed's typical avoidance of direct language, the use of "additional policy firming" can be interpreted as not ruling out the possibility of a rate hike.

In particular, the minutes stated that it would have been desirable to remove references to an "easing bias," which the market interprets as a signal for rate cuts. Usually, after each FOMC, the Fed includes language in its statement indicating the direction of future rate adjustments. The April statement, like that of March, included the phrase "the extent and timing of any additional adjustments." Maintaining the expression "additional adjustments," which emerged during a period when rate cuts were under consideration, is interpreted as a signal for an eventual cut.

At the April FOMC, Cleveland Fed President Loretta Mester, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all opposed language in the statement that would suggest a dovish stance.

The Iran War Seen as a 'Supply Shock'... Fed Takes Inflation More Seriously Than in March 

April FOMC Meeting Minutes

The Fed's perspective on inflation also changed compared to March. The April minutes repeatedly mentioned the phrase "higher for longer." The report recorded that "several participants believed a rate cut would only be appropriate when disinflation is firmly on track or when there are clear signs of labor market weakness."

Compared to the minutes from a month earlier in March, the tone has shifted significantly. In the March FOMC, the Fed stated that it was "too early to know" the impact of the initial oil shock from the Iran war on the economy. They also used phrases suggesting that "a rate cut could become appropriate at some point."

However, by April, the Fed interpreted the Iran war as a "supply shock." The minutes analyzed the rise in 2-year Treasury yields following the Middle East war, stating that the combination of sharply higher inflation expectations and falling real yields corresponded to an "adverse supply shock."

However, this does not mean the Fed is set to raise rates imminently. Most participants still favored maintaining the current target range for the federal funds rate at 3.5-3.75%. If the Middle East conflict subsides quickly, there remains room for a rate cut later this year.

The minutes made it clear that if inflation becomes entrenched again, additional tightening discussions could take priority over rate cuts. This means, contrary to market expectations, that any rate cut could be delayed further.

In fact, market expectations for a rate cut this year are rapidly receding. According to the minutes, market participants expect little change in the federal funds rate this year, while the options market is pricing in about a 30% chance of a rate hike by the first quarter of 2027.

According to FedWatch on the same day, market participants see the probability of the Fed keeping the target rate unchanged at the July and September FOMC meetings at 86.8% and 72.6%, respectively. The probability of a 0.25 percentage point increase (to 3.75-4.00%) is estimated at 10.3% and 23.3%, respectively.

This content was produced with the assistance of AI translation services.