With minutes due, Fed’s ‘family fight’ over interest rates could drag on

Divided Fed officials stated in their last meeting that they would find a solution to persistent inflation this year with a single interest rate increase. But history shows that policymakers will have a hard time stopping at this point.

In fact, there have been very few instances in the last 35 years where the Fed has made just one interest rate move, whether up or down. Rather, the central bank’s Federal Open Market Committee tends to move in rate cycles where it adjusts policy multiple times over a period to achieve the goal it wants to achieve.

“A lot of people are talking about a single rate hike. The committee usually doesn’t do that. So what’s the point of that?” old St. Louis Fed President Jim Bullard told CNBC on Monday. “So that generally means a tightening cycle, and I think markets are trying to smell that right now.”

On Wednesday, markets will get more clues about the direction of the Fed’s policy when the committee releases minutes from its June 16-17 meeting. The recap will offer a behind-the-scenes look at new Governor Kevin Warsh’s first meeting last month, which he described as a “good family fight” over the direction of interest rates.

History of cycles

The last meeting provided an update on participants’ views on rates and key economic indicators, with a significantly abbreviated statement clearly stating “The Committee will ensure price stability.”

In a “dot plot” chart of individual participants’ rate expectations, the committee is leaning towards an increase before the end of 2026, followed by a cut over the next two years.

But the FOMC has a history of rarely making one-time rate adjustments.

In the last cycle, it cut interest rates 3 times in the back half of 2025. Before that, the Fed had increased interest rates 3 times in 2024, 11 times in 2022-23, and 5 times in 2019-20.

In fact, you’d have to go back to 2015, which was the last year the committee made a single move, and that was mainly because it thought the economy was too unstable for a pre-planned walk cycle. If we go back to 1990, such movements were very rare.

The rationale is pretty simple: Officials think policy should be persistent and aggressive, and modest adjustments like quarter-point moves are rarely helpful when the Fed is trying to solve a problem.

In this case, the central bank’s problem is that inflation has been well above the 2 percent target for the last five years. Some officials believe that the easing of hostilities in the Middle East, the decline in oil prices and the reduced impact of tariffs could help moderate price increases, but there is serious disagreement as to whether the trend is upward or downward.

Bullard is not convinced that inflation will ease and thinks the Fed may need to act soon, before the midterm elections in November, even if there is a perception that an increase would be politically risky. President Donald Trump may be especially uneasy after appointing Warsh to replace current Gov. Jerome Powell, whom the president has frequently criticized.

“If you wait until after the election you may have to do more, and that’s a real risk for the committee here,” Bullard said. “If you wait too long you could be heading into winter or the first half of next year and you’ll have to do a lot now to keep inflation under control.”

But the minutes themselves may offer fewer clues than in previous years.

Investors looking for in-depth insight into internal discussions may be disappointed as the Warsh Fed appears committed to providing “forward guidance” and less direct communication about the path ahead.

The minutes were already sufficiently opaque because the officials were anonymous and vague quantifiers were used to reflect group sentiment at the meeting. The lack of clarity could intensify under Warsh.

“We expect Warsh to make the FOMC minutes less informative in terms of views expressed at FOMC meetings,” Standard Chartered strategist Steve Englander said in a client note. he said.

“Specifically, the ‘Participant Views’ section could greatly reduce ‘almost all/most/many/some/a few/a couple/one’, which indicates the degree of support for different views, risks and policy options among participants,” he added. “We think the minutes will become a more lethargic list of policy decisions, like when Paul Volcker was president.”

Volcker, who killed inflation, served between 1979 and 1987.

Inflation outlook is changing

While consumers are much more uneasy about future price increases, investors appear increasingly convinced that inflation will ease toward the Fed’s target over time.

Treasury market bonds, which investors use to price inflation expectations, are weak. The 5- and 10-year “breakeven” rates, or the difference between Treasury yields and inflation-linked bond yields, were near yearly lows, and other metrics are tracking the same pattern.

But the New York Fed’s monthly consumer survey for June showed inflation expectations at multi-year highs: The one-year outlook (3.7%) is at its highest since September 2023, while the three-year outlook (3.3%) is at its highest since June 2022.

But markets are largely in line with the Fed’s June plan.

Traders are pricing in a hike in early September, then see policymakers holding on for at least next year, according to a report from CME Group. FedWatch. The futures market is pricing in additional increases, but this is not possible until later years.

Not everyone agrees; Some on Wall Street think the Fed should take more aggressive action.

Bank of America recently raised its interest rate forecast and said it anticipates the central bank will need to approve three quarter-point increases before the end of this year.

“We were skeptical about the need for cuts in 2025. Both the data and our updated reading of the Fed’s response function suggest the Fed will reverse these cuts soon,” BofA economist Aditya Bhave said in a note. he said.

But the bank predicts the rate hike cycle will be short, allowing the Fed to remain on hold until 2027 after demonstrating its determination to keep inflation under control.