FED MINUTES: A POLICY IN THE MIDST OF GEOPOLITICAL RISK

FED MINUTES: A POLICY IN THE MIDST OF GEOPOLITICAL RISK

When the meeting of the Federal Open Markets Committee (FOMC) was held on 17-18 March, US and Iran were well in the thick of war. Jerome Powell had underlined that the war had raised the risks of inflation due to the trickle-down effect of oil and gas. That was one of the reasons the FOMC had refrained from any rate cuts, since that is not consistent at a time when inflation is on the way up. Of course, GDP pressures did justify rate cuts.

Interestingly, Powell had also underlined in the policy statement that rate hikes were not on the cards. Apparently, the most hawkish that the Fed would go would be to hold status quo on rates. The FOMC members were fairly mixed in their views. While only one member was still in favour of rate cuts, the other members were divided between status quo and a rate hike. Clearly, the rate hike debate is starting to catch on. That is the big story.

EIGHT THINGS WE READ FROM THE APRIL FED MINUTES

The minutes from the March 18 meeting (released April 08) reveal that FOMC members are gradually veering towards hawkishness. Here is a gist of the FOMC minutes.

The FOMC minutes indicate that the members are still expecting rate cuts with at least one rate cut before the end of 2026. The rate cut argument was more to assuage the macro conditions; should rising gas prices hit labour markets and consumer demand.

The gist of the minutes was the need to remain nimble and fleet-footed and change tack, if necessary, rather than get caught up with ideas like hawkish and dovish. The war is likely to spike inflation and also hit GDP growth and the labour markets.

Rate cut expectations have not changed with the Fed members still expecting one rate cut before the end of 2026, but little visibility beyond that. Members feel that sort of a decision would be called for if inflation normalizes post the war.

The main apprehension expressed by the members was that the higher fuel prices could hit purchasing power. This would impact consumer demand, corporate spending, and also have an impact on the labour market. That is the other downside of inflation.

While members are open to the possibility of a rate hike, it would only happen if the Middle East hostilities resulted in sustained inflation. It could be more of cost-push inflation created by supply chain constraints, of the type seen in 2021 and 2022.

The FOMC members expressed concerns over the non-farm payroll additions in the labour data, as most of the additions are only coming from the healthcare related sectors. This raises questions over long-term sustainability.

The slowdown in GDP has been a cause for worry for the FOMC members. For instance, the GDP grew by just 0.7% in the fourth quarter ended December 2025. Also, the GDP growth in the first quarter ended March 2026 is estimated at just 1.3%.

While the rates stayed at 3.50%-3.75%, the FOMC has highlighted two-way risks of higher inflation and lower growth. For the first time, there could be a choice between a rate cut and rate hike for the Federal Reserve.

While the Fed rates were held, there is an uncertain trend in the FOMC; with a strong probability of rates being moved both ways.

WHAT DOES THE CME FEDWATCH TELL US?

The CME Fedwatch calculates the probability of rate hikes based on the trading in Fed Fund futures. Here are the probabilities across milestone meetings over next 2 years.

Data source: CME Fedwatch

The probabilities at this juncture present a rather decisive picture. Rate hikes are ruled out in 2026. In 2027, there is still a tentative chance of a 25-bps rate cut by June 2027 and only by December 2027, there is a more decisive chance of a rate cut. Of course, the picture could change drastically; should the truce sustain and peace return to the Middle East!