Fed officials see rate hike ahead if inflation stays elevated, minutes show

WASHINGTON — A majority of Fed officials predicted at their last meeting that interest rate hikes would be necessary if the Iran war continued to worsen inflation, according to minutes released Wednesday.

Although the rate-setting Federal Open Market Committee voted once again to keep the benchmark interest rate between 3.5 percent and 3.75 percent, the meeting featured four “no” votes, the highest number since 1992, and a clearly growing level of disagreement over where policy should go.

The issue was the impact of the Iran war on prices and how this would be reflected in monetary policy. Officials differed on how long the impact of the war would last and whether the post-meeting statement would continue to reflect a bias towards a rate cut as the next step.

While some meeting participants said a rate cut would be appropriate when it became clear that inflation had returned to the Fed’s 2% target or that the labor market had weakened, “but the majority of participants emphasized that some policy tightening would likely be appropriate if inflation remained consistently above 2 percent.”

Three of the four “no” votes came from regional leaders who argued that policymakers should keep increase options open in an environment where inflation is rising. The group agreed that benchmark interest-bearing funds rates should be kept steady but objected to the inclusion of language referring to “additional adjustments” to rates. It is widely believed that the phrase means that the next move will be a disruption.

“Many participants indicated in the post-meeting statement that they would prefer to have language removed that suggested that bias had been mitigated regarding the likely direction of the Committee’s future interest rate decisions,” the minutes said.

However, since it did not constitute a “very” majority, as the Fed puts it, the statement remained in the statement.

Although officials debated how long the impact on inflation would last, they generally agreed that the Iran dispute would have “significant consequences” for the Fed as it pursues its dual goals of full employment and stable prices.

“The vast majority of respondents noted an increasing risk that inflation would take longer to return to the Committee’s 2 percent target than they had previously expected,” the document said. The statement was included.

The meeting took place against an interesting backdrop: This was the last time Jerome Powell chaired the committee, and this came amid rising inflationary pressures resulting mainly from the war as well as other factors that made officials cautious about the future of policy.