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) indicate a shift in policy stance. Just a month ago, at the March meeting, a dovish bias prevailed, with the consensus being that "a rate cut would be appropriate at the right time." However, the April minutes contained statements that were the exact opposite.

This change comes amid growing concerns that the aftermath of the Iran war, surging international oil prices, and supply chain instability could rekindle inflation. As a result, the prospect of a rate cut within the year, which the market had been anticipating, has become even more remote.

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

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

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

Of particular note is the mention of "additional policy firming" in the minutes. The minutes state, "If inflation persists above 2%, it is likely that some degree of additional policy firming would be appropriate." Considering the Fed's typical cautious language, the use of the term "additional policy firming" can be interpreted as not ruling out the possibility of a rate hike.

It was also stated that it would have been desirable to remove the "easing bias" language, which implies a rate cut that the market has been hoping for. Normally, after the FOMC, the Fed includes language in its statement to indicate the direction of future rate adjustments. The April statement, like the one in March, included the phrase "the extent and timing of any additional adjustments." Maintaining the term "additional adjustments," which first appeared when a rate cut was being considered, is read as a sign of a potential cut.

At the April FOMC, Beth Hammack, President of the Federal Reserve Bank of Cleveland, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, and Lorie Logan, President of the Federal Reserve Bank of Dallas, opposed the inclusion of language in the statement that would suggest an easing stance.

Iran War Interpreted as a 'Supply Shock'... Inflation Seen as More Severe Than in March 

April FOMC Meeting Minutes

The perspective on inflation also shifted from March. The phrase "higher for longer" regarding interest rates appeared repeatedly in the April minutes. The report noted, "Several participants believed that a rate cut would be appropriate only when disinflation is clearly on track or when there are clear signs of labor market weakening."

Compared to the minutes from March, the atmosphere has changed significantly. In the March FOMC, the Fed stated it was "too early to know" the economic impact of the initial oil price shock from the Iran war. The outlook for rates also included the phrase that "at some point, a rate cut could become appropriate."

However, in April, the Fed interpreted the Iran war as a "supply shock." The minutes analyzed the rise in 2-year Treasury yields after the Middle East conflict and judged that the combination of a surge in expected inflation and a decline in real rates "corresponds to an adverse supply shock."

However, this does not mean the Fed will move to raise rates immediately. Most participants still favored maintaining the current target range (3.5–3.75%). If the Middle East war subsides quickly, there remains a possibility for rate cuts later in the year.

The minutes clearly state that if inflation becomes entrenched again, discussions on further tightening would take precedence over rate cuts. This means that, contrary to market expectations, the timing of a rate cut could be further delayed.

Indeed, 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 reflects about a 30% chance of a rate hike by the first quarter of 2027.

According to FedWatch on this day, market participants see the probability of the Fed maintaining the current target range at the July and September FOMC meetings at 86.8% and 72.6%, respectively. The probability of a 0.25 percentage point rate hike (to 3.75–4.00%) is estimated at 10.3% for July and 23.3% for September.

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