FED MINUTES – GETTING INCREASINGLY HAWKISH

FED MINUTES – GETTING INCREASINGLY HAWKISH

The FOMC minutes of the policy meet held on 28-29 July were published by the Fed on 19-August. The Fed finds itself on the horns of a dilemma. Fed has explicitly reiterated its commitment to price stability but its actions have not been in sync. For example, US inflation has been well above the 2% target for 62 consecutive months. Despite the data, the unwillingness of the Fed to raise Fed rates has been intriguing markets.

The Fed policy statement on 29-July had shown clear divergence in views with the vote on status quo at 9:3. Dissenters have been urging the Fed to hike rates immediately to push inflation lower. Apparently, there are a number of FOMC members who are sitting on the fence for now, but given a choice, would prefer a rate hike. Amidst this confusion, Kevin Warsh wants to reduce the number of FOMC meetings a year from 8 to 6.

WHAT WE READ FROM THE AUGUST FED MINUTES

Here are some key takeaways from the Fed minutes released on August 19, 2026.

The decision to hold the Fed rates in the range of 3.50%-3.75% belied the fact that the frictions were quite hard. While the vote was 9:3 in favour of status quo, there were possibly many fence sitters, as was evident in the starkly hawkish tone emerging from the minutes of the debate leading up toe FOMC decision.

Apart from the 9:3 vote, the general consensus among most of the FOMC members (voting and non-voting) was that the current conditions were not restrictive enough to bring inflation back to 2%. After all, the actual headline inflation has now been above the 2% target level for 62 months in succession, raising questions about the target.

While the rate of unemployment has come down to 4.1% in July 2026, the non-farm payrolls have been a matter of concern. In July, the non-farm payrolls fell by -23,000, while an accretion of 1,00,000 per month is needed to sustain GDP growth at above 2%. The weak non-farm payroll additions was a key factor in the status quo on rates.

One pressure point that the FOMC discussed was the persistent spike in the US interest rates. For instance, US 10-year yields at 4.706% and 30-year yields at 5.247%, are way above the current repo rate range. This is an indication that the markets are factoring in, at least, one or 2 rate hikes of 50 basis points during the current calendar year.

Both headline inflation and core inflation have been higher than the year-ago period. This can be attributed to a combination of factors like the lag effect of US tariffs in imports, disruption of the energy markets due to the US-Iran war, and persistent weakness in the US dollar. Some of these effects may abate by end of 2026.

With more dissenting voices being heard, it is expected that the 9:3 vote could become a 7:5 vote in the September FOMC meet. At that point, it may be difficult for the Fed chair to postpone rate hikes. However, while inflation makes a case for a rate hike, it has rarely happened in the past after a sharp fall in the non-farm payrolls.

If the July headline inflation and core inflation shows a downward trend, then the Fed can afford to wait beyond September to hike rates. For the Fed, it is not just about price stability, but also about the image of Fed being at the forefront of fighting inflation.

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 (# current Fed Rate Range)

Rate cuts are ruled out till late 2027, although data shifts could change the view. The probability of a rate hike in September 2026 is still quite low at 37.3%. However, a 25-bps rate hike looks lot more likely in December 2026 with a probability of 67.4%. However, through 2026 and 2027, the peak probability of another rate hike is less than 50%, so even in a worst-case scenario, the rate hikes will be limited to 25 bps only.

At a time when the market needs more guidance about the Fed moves, Kevin Warsh is trying to reduce the communication. Firstly, he has reduced the projection content to minimal in the Fed statement and is being more reactive to data. Secondly, the Fed statement and the minutes are very brief, and to the point. Thirdly, Warsh now wants to reduce the number of FOMC meetings from 8 per year to 6 per year. One hopes that the Fed focuses on sharper communication than on curtailing communication.