Fed Minutes: Rate Hike Probabilities Pivot Significantly, Fed Shifts from Signaling Rate Cuts to Neutral Stance

BlockBeats News, May 2nd. Nick Timiraos, known as the "Fed's Mouthpiece," pointed out in his article that the Fed's internal debate on the interest rate path has reached a critical turning point. Officials are no longer arguing about when to resume rate cuts but are beginning to discuss the conditions under which a rate hike may be necessary. In the statement following Wednesday's policy meeting, the dissent came from the regional Fed presidents of Dallas, Cleveland, and Minneapolis, who officially opposed retaining the wording implying "the next move is more likely to be a rate cut." Outgoing Chairman Powell acknowledged that the committee had engaged in a "lively discussion" and, although for procedural reasons the guidance was not removed at this time, he clearly stated that the committee's stance is shifting from dovish to neutral and admitted that the arguments of the dissenters "completely hold water." This statement signifies that the Fed has moved partially from the phase of signaling rate cuts to a neutral wait-and-see phase.

The core factor driving this shift is the sustained energy shock resulting from the substantial closure of the Hormuz Strait. Unlike past one-off price fluctuations that could dissipate on their own, this supply chain interruption could lead to persistently high energy costs for months, enough to seep into broader prices and raise inflation expectations. Kashkari further outlined the rate hike scenario in his Friday speech: if the strait fails to promptly reopen for navigation, a series of rate hikes may be necessary even at the cost of further weakening the labor market. Former Fed senior economist William English pointed out that the current federal rate staying put as inflation rises is essentially passive easing, which becomes increasingly unsustainable the longer it continues.

It is worth noting that the dissent from the three officials is about policy wording rather than actual rate actions, which is highly unusual in Fed history, with the last similar situation dating back to September 2020. This debate will be handed over to Kevin Wash, who will take over as chairman in mid-May. Powell's term is coming to an end, and the Fed's next policy meeting will be held about a month after his departure.