Last week’s release of the April shows a growing push among the FOMC members to drop any indication of an easing bias. This has led the media to assume the Fed is more hawkish. Three weeks ago, at that meeting, three members dissented because they felt the language in the statement was biased toward easing. With the minutes released, we now know that there were more than three members with similar views but were unwilling to officially dissent at the meeting. Their chief concern is that inflationary pressures driven by tariffs, energy costs, and geopolitical risks in the Middle East could keep elevated for longer.
We think the Fed’s mindset is largely neutral, not necessarily hawkish, as the media and markets largely portray. Fed members are trying to assess how transitory the jump in energy and related costs is. Thus, given the volatile situation in Iran, which could end in peace within days or with missiles across the Middle East, most Fed members are not ready to be hawkish and hike rates or dovish and cut rates. As the minutes state in the last sentence below, “monetary policy was not on a preset course.”
The second graphic shows that the market believes the Fed has a slight hawkish bias. are pricing in a 72% probability that the Fed will hike rates at least once over the next year.
The Week Ahead
This holiday-shortened week should be quiet on the economic and earnings front. The economic highlight will be the data on Wednesday. Currently, the consensus is for to increase by 0.4% and to rise by 0.7%. The second revision of the first-quarter will also be released that day. The expectation is for an increase from the originally posted +0.5%.
Given the lack of earnings reports from major companies and limited economic data, Iran-related headlines will most likely be the predominant driver of markets.