The number of Federal Reserve policymakers willing to consider an interest rate hike this year rose between the January and March meetings, as higher gas prices stemming from the Iran war threatened to worsen inflation in the coming months.
Minutes of the Fed’s March 17-18 meeting, released on Wednesday, showed that “some” of the central bank’s 19 policymakers on its rate-setting committee supported changing their post-meeting statement to reflect the potential for a future rate hike. That is an increase from “several” in January. The Fed doesn’t disclose precise numbers of how many officials supported each position, but in Fed jargon, ‘some’ is considered more than ‘several’.
And “many” of the officials pointed to the risk that higher oil and gas prices could keep inflation elevated for “longer than expected, which could call for rate increases” to push inflation back down.
For about 18 months, the Fed has leaned towards cutting rates, and in its meetings has alternated between cuts and no change to rates. The slow shift towards considering potential hikes marks a major change from that trend. At the beginning of this year, financial markets expected several rate reductions. Now investors don’t expect a cut until late 2027, future prices show.
Ultimately, the Fed kept its key rate unchanged at its March meeting at about 3.6 per cent. It has stood pat in its first two meetings this year after cutting its rate three times at the end of 2025. Chair Jerome Powell, at a news conference after the meeting, downplayed projections by officials that the Fed could reduce its rate once this year.
Another reduction depended on underlying inflation cooling steadily this year, Powell said. “If we don’t see that progress then you won’t see the rate cut,” he said then.
The minutes, released three weeks after the meeting, underscore the Fed’s dilemma as it seeks to fill its congressional mandates of low inflation and maximum employment. Fed officials acknowledged that the Iran conflict could also force households to cut back spending to offset higher gas prices, according to the minutes, which would slow growth and raise unemployment.
The central bank typically raises rates to cool the economy and combat inflation, while it would cut them to bolster growth and hiring. Navigating this “two-sided” risk of higher unemployment and higher inflation poses a difficult challenge for the Fed.
On Friday, the first signs of the impact the gas price spike is having on inflation will emerge, as the government is scheduled to release the March inflation report. Economists forecast it will show a huge 0.9 per cent increase in March from February, with prices rising 3.4 per cent, compared to a year earlier. In February, inflation was just 2.4 per cent. The Fed targets a 2 per cent inflation rate, and officials will likely be unnerved by a steady increase.
Earlier this week, Beth Hammack, president of the Federal Reserve Bank of Cleveland, said that estimates by her bank show inflation will likely rise even higher this month. “Inflation has been running above our target for more than five years now,” she added in an interview, voicing a common concern among many policymakers, and a further increase would mean it is “moving in the wrong direction”.
– AP
