US Fed minutes show growing openness to rate hikes at March meeting

WASHINGTON – A growing group of Federal Reserve policymakers felt in March that interest rate hikes might be needed to counter inflation that continued to exceed the central bank’s 2 per cent target, particularly given the inflationary impact of the US-Israeli war with Iran, according to the minutes of their March 17-18 meeting.

“Some participants judged that there was a strong case for a two-sided description of the (Federal Open Market) Committee’s future interest rate decisions in the post-meeting statement, reflecting the possibility that upwards adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the minutes said.

At the January meeting, a smaller group of “several” officials were willing to open the door to possible rate hikes, but by March and the outbreak of the war, “many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices”.

Stocks appeared unfazed by the minutes’ hawkish tone, with major indexes higher on hopes of a lasting settlement of the Iran war.

Interest rate futures traders slightly pared earlier bets on the Fed easing later in 2026, though bets on any Fed rate hike remained negligible.

The Fed in March held its benchmark overnight interest rate steady in the 3.5 per cent to 3.75 per cent range, while nodding to the fresh uncertainty the war had introduced to the economic outlook.

Despite the inflation risks, however, “many participants” still saw rate cuts as part of their baseline outlook, with “most participants” judging that an extended conflict in the Middle East would do enough damage to economic growth that even more cuts would be warranted.

“Most participants raised the concern that a protracted conflict in the Middle East could lead to a further softening in labour market conditions, which could warrant additional rate cuts, as substantially higher oil prices could reduce households’ purchasing power, tighten financial conditions and reduce growth abroad,” the minutes said.

War disrupted outlook

The minutes were released on April 8, a day after the US and Iran agreed to a two-week ceasefire.

The news caused oil prices to drop more than 15 per cent to around US$92 a barrel.

The back-and-forth among policymakers at the meeting in March highlighted how the conflict in the Middle East, which disrupted global shipping and caused the price of oil to jump more than 50 per cent, was pulling the Fed in conflicting directions, threatening both its inflation goal and full employment mandate.

At the meeting, the Fed signalled that it was unlikely to change its policy rate until it was clearer whether the impact on inflation or the job market seemed to be the greater risk. In new economic projections issued alongside its policy statement, officials pencilled in higher inflation for the year, but little change in the unemployment rate.

In presentations at the meeting, Fed staff saw risks that economic and job growth would be weaker and inflation higher than expected in their January outlook, given “the potential economic effects of developments in the Middle East, government policy changes and the adoption of AI”.

Given that inflation has been above target since 2021, “a salient risk was that inflation could prove to be more persistent than the staff anticipated”. REUTERS