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

Divided Federal Reserve officials indicated at their last meeting that they will address persistent inflation this year with one interest rate hike. History, though, suggests that policymakers will have a hard time stopping there.

In fact, there have been few instances over the past 35 years or so when the Fed has only made one rate move, be it 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 meet whatever goal it seeks to accomplish.

“A lot of people are talking about one rate increase. The committee does not generally do that. I mean, what’s the point of that?” former St. Louis Fed President Jim Bullard told CNBC on Monday. “So, usually it means a tightening cycle, and I think markets are trying to sniff that out right now.”

Markets will get more clues Wednesday about the Fed’s policy direction when the committee releases minutes from its June 16-17 meeting. The summary will provide a glimpse behind the curtain of new Chairman Kevin Warsh’s first meeting, which he characterized last month as “a good family fight” on the direction of rates.

A history of cycles

The last meeting featured an update on participants’ views on rates and key economic metrics and a dramatically shortened statement that flatly stated, “The Committee will deliver price stability.”

In the “dot plot” grid of individual participants’ rate expectations, the committee leaned to a hike before the end of 2026 and then one cut each in the next two years.

But the FOMC’s history is that it rarely makes one-off rate adjustments.

In the last cycle, it cut three times in the back half of 2025. Before that, the Fed cut three times in 2024, hiked 11 times between 2022-23 and cut five times between 2019-20.

In fact, you’d have to go back to 2015 for the last time the committee made just one move, and that was primarily because it considered the economy too unstable for a previously planned hiking cycle. Going back to 1990, such moves were rarely seen.

The reasoning is fairly straightforward: Officials think policy needs to be persistent and aggressive, and modest tweaks like quarter-point moves rarely help when the Fed is trying to solve a problem.

In this instance, the central bank’s problem is inflation that is running well above its 2% target for the past five years. Some officials believe an easing of hostilities in the Middle East, a decline in oil prices and the fading impacts of tariffs could help ease price increases, but there is significant disagreement on whether the trend is down or up.

Bullard isn’t as convinced inflation will unwind and thinks the Fed may have to act soon — before the November midterm election, even if there’s a perception that an increase would be politically risky. President Donald Trump, in particular, could get restless after appointing Warsh to succeed now-Governor Jerome Powell, whom the president frequently criticized.

“If you wait till after the election, you might have to do more, and that’s really the risk for the committee here,” Bullard said. “You wait too long, and then you might get into the winter or first half of next year, and now you have to do quite a bit in order to keep inflation under control.”

The minutes themselves, however, may offer fewer clues than in previous years.

Investors looking for deep insight on the internal debate may be disappointed as the Warsh Fed appears set to provide less direct communication and “forward guidance” about the path ahead.

Minutes already had been inscrutable enough, with officials cloaked in anonymity and vague quantifiers used to reflect group sentiment at the meeting. The lack of clarity could intensify under Warsh’s direction.

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

“In particular, the ‘Participant Views’ section may greatly reduce the ‘almost all/most/many/some/a few/a couple/one’ phrasing that indicates the degree of support among participants for differing views, risks and policy options,” he added. “We think the minutes will become a more anodyne listing of policy decisions, such as when Paul Volcker was chair.”

The inflation-slaying Volcker served between 1979 and 1987.

Inflation outlook varies

Investors increasingly appear to believe inflation will drift back toward the Fed’s target over time, though consumers have expressed considerably more discomfort about future price increases.

Treasury market securities that investors use to price in inflation expectations are subdued. The 5- and 10 year “breakeven” rates, or the difference between yields on Treasurys and inflation-backed notes, have been around their lowest levels of the year, and other metrics are following suit.

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

Markets, though, are largely in line with the Fed’s June blueprint.

Traders are pricing in a hike as early as September, then see policymakers staying on hold for at least the next year, according to the CME Group’s FedWatch tool. The futures market is pricing in additional hikes, but not until later years.

Not everyone agrees, with some on Wall Street expecting the Fed to have to take more aggressive action.

Bank of America recently raised its interest rate forecast, saying it now sees the central bank having to approve three quarter-percentage-point hikes before the end of this year.

“We were skeptical of the need for cuts in 2025. Both the data and our updated read of the Fed’s reaction function suggest it will reverse those cuts in short order,” BofA economist Aditya Bhave said in a note.

The bank, however, expects the hiking cycle will be brief, allowing the Fed to stay on hold in 2027 after showing its resolve to tame inflation.