Iran War Fuels Inflation; More Fed Officials Lean Toward Rate Hikes, Minutes Show
Minutes from the Federal Reserve's April meeting reveal that concerns over inflation, driven by the war with Iran, are intensifying among officials. A growing number are now open to the possibility of raising interest rates, signaling an increasingly hawkish policy-making team for incoming Chair Kevin Warsh. Markets are already pricing in this shift, with the 2-year Treasury yield hitting a 15-month high.
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- 📰 Published: May 21, 2026 at 09:29
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Federal Reserve officials' concerns about the war with Iran pushing up inflation have intensified, with a growing number of them starting to accept that an interest rate hike may be necessary. This suggests that incoming Chair Kevin Warsh will inherit an increasingly hawkish central bank policy-making team.
According to the minutes of the April 28-29 meeting released today, a majority of Fed policymakers believed that "some degree of policy tightening might become appropriate" if inflation continues to run above the central bank's 2% target, Reuters reported.
"To address this possibility, many participants indicated they would favor removing some language from the post-meeting statement that had implied a loosening bias in the Fed's future rate decisions," the minutes stated.
In the Fed's precise terminology, "many" is slightly less than a "majority," indicating that when the decision was made to keep the statement unchanged, three regional Fed bank presidents dissented, and at least as many non-voting members supported their stance.
Changing the statement could have been seen as constraining the new Fed Chair, Kevin Warsh, who had expressed support for rate cuts before the Iran war broke out.
According to the minutes, policymakers "generally agreed" that the policy rate might need to remain unchanged for longer than previously expected. A "vast majority" of officials noted that even with the labor market expected to remain stable in the short term, it might take longer than previously thought for inflation to return to the 2% target.
Indeed, while a few officials thought a rate cut would be appropriate once inflation cooled, their number was smaller than the "many" officials who held that view at the March meeting.
"While the June meeting will welcome a new Fed chair, forging a consensus for either a rate hike or a cut in the near term will be a very difficult task," said Ryan Sweet, chief U.S. economist at Oxford Economics.
These minutes, seen as the most divided in a generation, further reveal the two-faction dynamic Warsh is about to face: one faction of growing size, concerned about inflationary pressures from the Iran war and opposed to any future rate cut discussions, and another, shrinking faction that favors lower borrowing costs.
The primary driver for the hawkish turn among Fed policymakers remains inflation, with these pressures exacerbated by the U.S.- and Israeli-led war against Iran. The conflict has pushed up energy prices and also put cost pressure on more goods and services.
According to the minutes, the April meeting was the second in a row where more officials saw a rate hike as a potentially appropriate option if inflation remains above target.
Warsh has said he likes a "good family fight" and has made the case for rate cuts. He will be sworn in as Fed Chair at a White House ceremony hosted by President Trump.
Trump appointed Warsh and has been publicly demanding significant rate cuts. However, the minutes show it will be very difficult to persuade the Fed to move toward a more accommodative policy, and Trump has recently downplayed those expectations.
After Jerome Powell's 8-year tenure as Fed Chair, Warsh will preside over his first meeting on June 16-17, with markets widely expecting no change in interest rates, let alone a cut.
In fact, U.S. and global bond markets increasingly reflect a consensus that the Fed and other major central banks may soon raise rates to combat war-induced inflation.
The U.S. 2-year Treasury yield, seen as a bellwether for Fed policy expectations, has risen from just under 3.40% on February 27 to over 4.10% yesterday, a 15-month high.
Meanwhile, a Reuters poll shows a clear shift in economists' expectations for rate cuts this year, with now less than 50% of respondents forecasting a cut before December. About half believe rates will remain unchanged this year, and a few respondents even predict at least one rate hike.
According to the minutes of the April 28-29 meeting released today, a majority of Fed policymakers believed that "some degree of policy tightening might become appropriate" if inflation continues to run above the central bank's 2% target, Reuters reported.
"To address this possibility, many participants indicated they would favor removing some language from the post-meeting statement that had implied a loosening bias in the Fed's future rate decisions," the minutes stated.
In the Fed's precise terminology, "many" is slightly less than a "majority," indicating that when the decision was made to keep the statement unchanged, three regional Fed bank presidents dissented, and at least as many non-voting members supported their stance.
Changing the statement could have been seen as constraining the new Fed Chair, Kevin Warsh, who had expressed support for rate cuts before the Iran war broke out.
According to the minutes, policymakers "generally agreed" that the policy rate might need to remain unchanged for longer than previously expected. A "vast majority" of officials noted that even with the labor market expected to remain stable in the short term, it might take longer than previously thought for inflation to return to the 2% target.
Indeed, while a few officials thought a rate cut would be appropriate once inflation cooled, their number was smaller than the "many" officials who held that view at the March meeting.
"While the June meeting will welcome a new Fed chair, forging a consensus for either a rate hike or a cut in the near term will be a very difficult task," said Ryan Sweet, chief U.S. economist at Oxford Economics.
These minutes, seen as the most divided in a generation, further reveal the two-faction dynamic Warsh is about to face: one faction of growing size, concerned about inflationary pressures from the Iran war and opposed to any future rate cut discussions, and another, shrinking faction that favors lower borrowing costs.
The primary driver for the hawkish turn among Fed policymakers remains inflation, with these pressures exacerbated by the U.S.- and Israeli-led war against Iran. The conflict has pushed up energy prices and also put cost pressure on more goods and services.
According to the minutes, the April meeting was the second in a row where more officials saw a rate hike as a potentially appropriate option if inflation remains above target.
Warsh has said he likes a "good family fight" and has made the case for rate cuts. He will be sworn in as Fed Chair at a White House ceremony hosted by President Trump.
Trump appointed Warsh and has been publicly demanding significant rate cuts. However, the minutes show it will be very difficult to persuade the Fed to move toward a more accommodative policy, and Trump has recently downplayed those expectations.
After Jerome Powell's 8-year tenure as Fed Chair, Warsh will preside over his first meeting on June 16-17, with markets widely expecting no change in interest rates, let alone a cut.
In fact, U.S. and global bond markets increasingly reflect a consensus that the Fed and other major central banks may soon raise rates to combat war-induced inflation.
The U.S. 2-year Treasury yield, seen as a bellwether for Fed policy expectations, has risen from just under 3.40% on February 27 to over 4.10% yesterday, a 15-month high.
Meanwhile, a Reuters poll shows a clear shift in economists' expectations for rate cuts this year, with now less than 50% of respondents forecasting a cut before December. About half believe rates will remain unchanged this year, and a few respondents even predict at least one rate hike.