Written by Dan Burns
WASHINGTON, May 20 (Reuters) – The depth of the divergence between Federal Reserve policymakers’ views on the direction of interest rates and the extent of inflation will be seen on Wednesday with the release of readings from the most divided meeting in a generation, which also marked the end of Chairman Jerome Powell’s leadership.
As Powell’s successor Kevin Warsh is expected to be sworn in on Friday, Wednesday’s release of the minutes of the 28-29th meeting will add critical details about the changes to the two blocs of Fed officials waiting to greet him – increasingly wary of inflation caused by the Iran war and any talk of future rate cuts, and lower borrowing costs.
Warsh, who says he enjoys a “good family fight” and has also argued in favor of low interest rates, will become Fed chairman at a White House event hosted by President Donald Trump, who nominated him and has been vocal in his calls for deep rate cuts. The minutes could show how difficult it will be to win in a simple policy battle, even though Trump himself recently lowered those expectations.
The Federal Open Market Committee, the Fed’s rate-setting body, left its short-term policy rate unchanged in the range from 3.50% to 3.75% last month, but four policymakers abstained, the most since 1992.
Moreover, the conflicts were mutual. One official — Governor Stephen Miran, another Trump appointee who will leave the Fed on Friday to vacate Warsh’s seat — argued in favor, too, of a rate cut. Three others, on the other hand, argued against the continued use of language in the policy statement accompanying the proposal that suggests the Fed may still cut rates.
Those three — and others in the weeks since the meeting — point to inflation running well above the Fed’s 2% target and likely to move further away from it in the near term due to increased price pressures fueled by the US-Israeli war in Iran. The conflict has sent oil prices up more than 50 percent, and recent consumer and inflation data show that price pressures have begun to expand beyond the energy sector.
They also note the strong unemployment rate and two months of stronger-than-expected job creation indicate that the job market remains strong and does not need low interest rates to support it.
A key focus of Wednesday’s reading will be the section used to explain the FOMC’s debate on the monetary policy outlook. The minutes of the March meeting, for example, showed an increase from the previous meeting in January in the number of policymakers who felt that there was a “double-sided explanation of future interest rate decisions in the meeting statement”. That indicated that many among them felt that a rate hike would be appropriate if inflation were to remain above target.
“While Wednesday’s minutes remain firm given the strong April jobs report and last week’s inflation reading, they will be useful in measuring the changing size of the group that advocates neutral guidance,” Deutsche Bank analysts wrote ahead of the release.
“As a reminder, three officials objected to a slight bias in the guidance language of the April FOMC meeting statement. Since that meeting, Fedspeak has moved somewhat.”
Indeed, after eight years in charge of Powell, Warsh will call his first Fed meeting on June 16-17 with no apparent hope of a rate change, and certainly no rate cut.
US and international bond markets are, in fact, increasingly confident that the Fed and other central banks will raise interest rates before too long to stem war-induced inflation. The yield on the 2-year US Treasury note, a proxy for Fed policy expectations, shot up from just under 3.40% on February 27, a day before the US and Israel launched airstrikes against Iran, to a 15-month high above 4.10% on Tuesday.
Meanwhile, a Reuters poll on Tuesday showed a sharp shift among economists away from strong expectations of a rate cut this year, with less than 50% now predicting a cut in December, down from two-thirds just a month earlier. About half see no change in prices this year, and a handful of respondents have penciled in at least one price increase.
(Reporting by Dan Burns; Editing by Chizu Nomiyama)
