FOMC Minutes: Fed Split on Rate Hikes vs Cuts

The most significant revelation in these minutes is the explicit discussion of rate increases. "Some participants judged that there was a strong case for a two-sided description of the Committee's future interest rate decisions," the minutes state, "reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels."

This is not hedging. This is a faction within the FOMC that wants the door open to tightening. Many participants pointed to the risk of inflation "remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases to help bring inflation down."

The 10-year Treasury yield sits at 4.33% as of April 7, with the 2-year at 3.81%. The yield curve spread of 0.52% reflects a market that has largely abandoned the aggressive easing cycle priced in six months ago. The modal path from options prices is now consistent with zero cuts this year — a dramatic shift from two cuts previously expected.

Front-month crude oil futures rose approximately 50% over the intermeeting period. The minutes make clear this is the dominant variable driving the policy debate. Staff revised their 2026 inflation forecast higher "primarily reflecting incoming data and an expected boost to consumer energy prices."

The "vast majority" of participants judged that progress toward 2% inflation "could be slower than previously expected" and that "the risk of inflation running persistently above the Committee's objective had increased." Several participants flagged a particularly dangerous feedback loop: after several years of above-target inflation, longer-term inflation expectations "could become more sensitive to energy price increases."

One-year inflation swap rates rose nearly 50 basis points during the intermeeting period. The saving grace — longer-dated inflation compensation was "little changed" — suggests markets still treat the oil shock as temporary. But the Fed's own staff acknowledged that a "prolonged conflict" would change that calculus entirely.

Petrol and diesel prices continue rising even as ceasefire talks progress, and UK farmers are warning that food costs will stay elevated regardless of diplomatic outcomes. The supply chain disruptions from Strait of Hormuz uncertainty don't reverse overnight.

The Committee agreed that "monetary policy was not on a preset course and would be determined on a meeting-by-meeting basis." Translation: nobody knows what happens next, and the bar for action in either direction has risen.

The staff projects real GDP growth roughly in line with potential through 2028, with inflation declining toward 2% by the end of 2027 — but only after tariff and oil price effects fade. That's a lot of optimistic assumptions baked into a baseline that even the staff admits carries elevated uncertainty.

Reserves are projected to hit their trough in late April at roughly the level seen at year-end 2025, with the pace of reserve management purchases likely to slow afterward. For fixed-income investors, the message is clear: don't count on the Fed as a buyer of last resort.

The next FOMC meeting on April 28–29 will have another month of data to parse. If oil stays elevated and core PCE doesn't budge from the 3% range, the rate hike faction will have stronger ammunition. If ceasefire progress holds and energy prices retreat, the easing camp gets its window. Either way, the March minutes confirm the Fed is stuck in a stagflation bind — and comfortable admitting it.