April FOMC minutes show the Fed may be in wait-and-watch mode at least till Q3

 

·       In the early US session on May 21, stocks and gold wobbled as Iran may or may not agree to transfer the ‘nuclear dust’ to any third country.

·       Overall, FOMC minutes show the Fed is quite hawkish on inflation and growth while moderately dovish on employment.

·       Theoretically, the Fed has to bring down both the inflation and the unemployment rate by around 100 and 50 bps for its dual mandate, and thus it has to maintain the present neutral stance rather than hike or cut them.

On May 20, 2026, some focus of the market was also on the April FOMC minutes, apart from Trump’s ongoing rhetoric on the Iran war/peace. As a recapitulation, the FOMC held a joint meeting with the Board of Governors on April 28–29, 2026. The committee left the target range for the federal funds rate unchanged at 3.50–3.25%.

Highlights of FOMC Minutes: April 28–29, 2026 (released May 20, 2026)

Staff reviews of the economic situation

Key Economic and Financial Developments

IInflation: Elevated and recently higher, driven by a sharp rise in global energy prices linked to the Middle East conflict. Total PCE inflation was around 2.8% (12-month) in February, with estimates rising to ~3.5% in March. Core PCE was ~3.0–3.2%. Core goods inflation rose (partly due to tariffs), while core services (including housing) eased somewhat. Near-term inflation expectations increased, but longer-term expectations remained well-anchored near 2%.

v Labor Market: Stabilized. The unemployment rate held steady near 4.3%. Job gains were low on average (volatile due to strikes/weather). Wage growth slowed to 3.5% (12-month).

v Economic Activity: Real GDP growth picked up in Q1 as prior drags (e.g., government shutdown effects) unwound. Private domestic final purchases showed solid momentum. Consumer spending is resilient, supported by wealth and fiscal factors, though higher energy prices strained lower-income households. Business fixed investment is strong, especially in technology/AI.

v Financial Markets: Equity prices recovered (tech-led), supported by de-escalation signals in the Middle East and strong earnings. Treasury yields rose modestly; the dollar retraced some gains. The private credit sector saw some stabilization amid ongoing redemptions. International effects included higher energy-driven inflation abroad and sensitivity to the conflict.

v Balance Sheet: Reserves remained ample. Limited use of ON RRP and standing repo facilities. The committee renewed liquidity swap lines.

v Staff and Participants' Outlook: Staff projected slightly stronger GDP growth but higher near-term inflation due to energy prices and conflict effects. Inflation is expected to moderate toward 2% later as temporary factors fade. Risks: Downside to employment/GDP; upside to inflation.

v Participants' Views:

·       High uncertainty from the Middle East conflict (energy prices, supply disruptions).

·       Solid growth supported by AI investment, productivity, and other factors. Labor market risks tilted to the downside.

· Inflation risks skewed higher; persistent effects possible if conflict lingers or tariffs rise further.

·       Many saw a potential need for policy to remain restrictive longer; some highlighted risks of embedded inflation or de-anchoring expectations.

v Policy Discussion and Decision:

·       Almost all participants supported holding rates steady to gather more information amid uncertainty. One dissented in favor of a 25 bps cut (citing downside labor risks).

·       The current policy is seen as near neutral. Future moves data-dependent.

· Some preference to adjust statement language by removing easing bias (next move more likely a cut). A majority highlighted that further firming could be appropriate if inflation stays persistently high.

·       Risk management: Balanced but elevated risks on both sides of the dual mandate, heavily influenced by geopolitics.

Staff Review of the Economic Situation (FOMC Minutes, April 28–29, 2026)

Summary of Key Takeaways

The staff assessment presents a picture of a resilient U.S. economy with stabilizing labor market conditions but rising inflationary pressures, primarily driven by a surge in energy prices linked to the Middle East conflict. Growth momentum remains solid underneath the headline numbers.

Inflation Developments

·       Headline PCE inflation: 2.8% (12-month) in February → estimated to jump to 3.5% in March, almost entirely due to higher energy prices.

·       Core PCE inflation (ex-food & energy): 3.0% in February → estimated 3.2% in March.

·       Composition:

o Core goods inflation increased notably (largely attributed to higher tariffs).

o Core services inflation declined, helped by slower increases in housing/shelter costs.

·       Near-term inflation has moved higher after being relatively stable compared to a year earlier.

Labor Market

·       Unemployment rate: Steady at 4.3% in March (little net change since mid-2024).

·       Employment gains: Volatile month-to-month (strike + bad weather effects), but low on average after smoothing.

·       Wage growth: Average hourly earnings are +3.5% (12-month) in March—down 0.7 percentage points from a year earlier, signaling some cooling in labor cost pressures.

Domestic Economic Activity

·       Real GDP: Picked up in Q1 2026 as the effects of the earlier federal government shutdown faded.

·       Net exports: Significant drag on GDP — exports rebounded, but imports rose even more (especially high-tech goods).

·       Private domestic final purchases (PCE + private fixed investment): Rose at a pace slightly faster than the average of the previous year. This is viewed as a better signal of underlying momentum than headline GDP.

International Developments

·       Moderate expansion abroad overall.

·       Asia: Strong demand for high-tech goods.

·       China: Solid growth (strong exports + moderate domestic recovery).

·       Mexico: Weakness in the automotive sector.

·       Middle East conflict effects: Visible strains—longer supplier delivery times and surging input prices are reported by European and Asian firms.

·       Foreign inflation: Generally near targets earlier, but a marked rise in March due to energy prices.

·       Policy response: Most foreign central banks are on hold due to uncertainty. The Bank of Mexico cut rates by 25 bps in late March.

Staff Economic Outlook (bold mine)

The staff's outlook for economic activity was slightly stronger than the one prepared for the March meeting. Real GDP was projected to slightly outpace potential in the coming years, with growth supported by favorable financial conditions, continued gains in AI-related capital spending, and a reversal of some of the factors that were expected to weigh on activity this year, including weak foreign growth and uncertainty about the outlook. The unemployment rate was expected to remain close to the staff's estimate of its longer-run rate this year and next before edging slightly below it in 2028.

The staff's inflation forecast for this year was higher than the one prepared for the March meeting, reflecting incoming data, higher energy prices, and other effects of the Middle East conflict that were expected to add to consumer price inflation. Inflation was projected to slow after the first half of this year as the economic effects of the various conflict-related factors dissipated and as the pass-through of higher tariffs to inflation waned; by the end of next year, inflation was expected to be close to 2 percent.

The staff continued to view the uncertainty around the projection as elevated in light of the conflict in the Middle East and the potential economic consequences of AI adoption. On balance, risks to the forecasts for employment and real GDP growth were seen as tilted to the downside. Risks to the inflation projection were seen as skewed to the upside: With inflation having run significantly above 2 percent over the past five years, with further increases in inflation likely to occur as a result of the conflict in the Middle East, and with emergent price pressures in a few categories that appeared unrelated to tariffs or energy prices, the staff viewed the possibility that inflation would be more persistent than anticipated as a salient risk.

Summary of Key Takeaways

The staff revised its projections modestly since the March meeting. They see a slightly stronger growth outlook but a noticeably higher near-term inflation path. Uncertainty remains elevated, with downside risks to growth/employment and upside risks to inflation, driven heavily by the Middle East conflict and AI-related developments/adoptions.

Real Economic Activity & Labor Market

·       GDP Growth: Real GDP is now projected to slightly outpace potential over the coming years.

·       Key supports: Favorable financial conditions, continued strong AI-related capital spending, and the unwinding of some temporary headwinds (weaker foreign growth and policy uncertainty).

·       Unemployment Rate: Expected to remain near the staff’s estimate of its longer-run natural rate (~4.0%) through 2026 and 2027, before edging slightly below it in 2028.

Inflation Projection

·       2026 Forecast: Higher than in the March projection.

·       Reflects recent data, sharply higher energy prices, and other direct/indirect effects of the Middle East conflict.

·       Path Ahead: Inflation is still expected to slow meaningfully after the first half of 2026.

o As conflict-related effects dissipate.

o As the pass-through of higher tariffs moderates.

·       End-2027 Target: Inflation projected to be close to 2%.

Risks and Uncertainty

·       Overall Uncertainty: Elevated, primarily due to:

o   Developments in the Middle East conflict.

o Potential economic consequences of widespread AI adoption.

·       Risk Balance:

o Employment and Real GDP: Risks tilted to the downside.

o Inflation: Risks skewed to the upside—viewed as a salient concern.

·       Inflation has already run well above 2% for the past five years.

o Additional near-term increases from the conflict are likely.

o Some emerging price pressures appear unrelated to tariffs or energy.

Participants' Views on Current Conditions and the Economic Outlook (bold mine)

Participants observed that overall inflation had moved up, in part because of recent global energy price increases, and remained above the committee's 2 percent longer-run goal. Participants generally noted that core inflation had also moved further above 2 percent. Several participants noted that the rate of increase in core goods prices remained elevated, at least in part reflecting the effects of tariffs. Some participants observed that higher fuel prices had caused a number of other prices to increase, including shipping costs and airfares.

In addition to energy price increases, several participants noted that supply disruptions associated with the conflict in the Middle East had caused prices for fertilizer and some other non-energy commodities to rise. Some participants noted that recent price increases in the information technology sector had contributed to higher inflation. A few of these participants remarked that, while price increases in the software category were contributing meaningfully to the increase in core inflation, price increases in that category may not be good predictors of future overall inflation.

Most participants noted that measures of longer-term inflation expectations remained stable. Some participants observed that measures of near-term inflation expectations had risen recently, likely reflecting the recent rise in global energy prices.

Participants anticipated that high energy prices would continue to put upward pressure on overall inflation in the near term. Participants generally expected that the effects of tariffs on core goods inflation would diminish over the course of this year. Some participants noted, however, that tariff rates could be increased above present levels, leading to additional upward pressure on inflation.

Several participants anticipated that higher productivity growth would put downward pressure on inflation, and a few of those participants remarked that the ongoing deceleration in housing services prices was likely to continue to be a source of disinflationary pressure.

Several participants observed that price pressures associated with strong AI investment expenditures would likely raise input costs for a range of industries. Several participants highlighted the possibility that, after several years of inflation above 2 percent, elevated inflation rates could begin to have an increased effect on wage- and price-setting decisions.

Almost all participants noted that there was a risk that the conflict in the Middle East could persist for an extended period or that, even after the conflict ended, the prices of oil and other commodities could remain elevated for longer than expected. In such scenarios, these participants expected continued upward pressure on inflation arising from supply chain disruptions, high energy prices, or the pass-through of higher input costs to other prices. The vast majority of participants noted an increased risk that inflation would take longer to return to the Committee's 2 percent objective than they had previously expected.

Participants generally expected labor market conditions to remain stable in the near term. Most participants judged, however, that risks to the employment side of the committee's dual mandate were tilted to the downside. Several participants cited evidence reported by business contacts suggesting that firms were likely to delay or reduce hiring because of overall economic uncertainty or in anticipation of adopting AI technologies. Several participants pointed to the possibility that a fall in labor demand could push the unemployment rate sharply higher.

Participants generally observed that economic activity appeared to be expanding at a solid pace. Most participants noted that business fixed investment remained robust, largely reflecting strength in the technology sector. Participants generally observed that consumer spending had been resilient. Many participants pointed to specific factors that were supporting consumer spending, including high levels of household wealth and fiscal policy.

Some participants commented that higher energy prices were putting strains on households, particularly lower-income households. Several participants noted that consumer sentiment had been low. With regard to the agricultural sector, a few participants remarked that high fuel and fertilizer prices were headwinds for farmers.

Participants generally anticipated that the pace of real GDP growth would remain solid this year. Many participants pointed to specific factors supporting growth in economic activity, including AI-related business fixed investment, productivity gains, financial conditions, fiscal policy, and changes in regulatory policy. Several participants remarked that the effects on economic activity of the recent increase in oil prices may be smaller than those seen in the past, citing factors such as the relatively large amount of current domestic oil production or the relatively low share of current domestic spending on oil. Most participants remarked that the developments in the Middle East had contributed to the uncertainty surrounding the outlook for economic activity, and several of these participants also noted that business contacts had emphasized heightened uncertainty about the economic outlook.

About the labor market, participants observed that the unemployment rate had been little changed in recent months, while job gains had remained low on average. Most participants judged that recent data, such as readings on the unemployment rate, layoffs, hiring, and labor force growth, suggested stabilization in the labor market.

Several participants commented that the recent low rates of job growth were not necessarily indicative of labor market fragility, as they could be roughly commensurate with the recent slow growth in the labor force. A few participants, however, pointed to the possibility that the low rates of job growth were a sign of labor market fragility. Some participants noted some signs of potential softness in the labor market, including the concentration of job growth in only a few sectors, declines in recent months in survey measures of job availability, and the modest rate of wage growth.

In their discussion of financial stability, several participants noted that asset valuations remained elevated and that such conditions heightened the possibility of sharp corrections should adverse developments materialize. Many participants commented on developments in the private credit sector. Some participants noted that recent investor withdrawals from certain private credit funds did not appear to pose risks to the broader financial system, although they judged that data limitations on balance sheet exposure of many private credit vehicles made such an assessment difficult. Some participants expressed concerns that losses in this sector could spill over to other markets, causing a broad credit contraction, or that firms dependent on private credit could face challenges securing alternative financing sources should investor sentiment in the private credit sector deteriorate further. A few participants highlighted risks associated with the substantial participation of hedge funds in the market for U.S. Treasury securities, noting that the unwinding of leveraged positions by these institutions could generate broader financial market disruption. A couple of participants discussed the implications of recent proposals to revamp the regulatory framework applying to both smaller and larger banks. Many participants mentioned the importance of addressing cybersecurity risks. Several of these participants discussed cybersecurity threats associated with rapid developments in AI technologies and commented that hostile cyber intrusions at systemically important financial firms or essential market infrastructure could materially impair financial system operations. These participants also emphasized the importance of collaborative approaches among regulatory agencies and financial institutions to mitigate cybersecurity risks. Some participants discussed ongoing and potential operational improvements related to various liquidity tools used to support the implementation of monetary policy and the stability of the financial system, including the discount window, SRP operations, and the standing liquidity swap arrangements. A few participants commented on the possibility that the committee could consider extending the terms of swap lines beyond one year, noting that a longer extension would be beneficial for financial stability.

In their consideration of monetary policy at this meeting, participants observed that inflation was elevated relative to the Committee's 2 percent longer-run objective, in part reflecting the recent increase in global energy prices. Participants generally further noted that recent indicators suggested that economic activity had been expanding at a solid pace. They also observed that job gains had remained low, on average, and that the unemployment rate had been little changed in recent months. Participants agreed that developments in the Middle East were contributing to a high level of uncertainty about the economic outlook.

Against this backdrop, almost all participants supported maintaining the current target range for the federal funds rate at this meeting. Participants generally judged that the current policy rate was within the range of plausible estimates of its neutral level and that the Committee still remained well positioned to base the extent and timing of adjustments to the policy rate on incoming data, the evolving outlook, and the balance of risks. They remarked that holding the policy rate steady would allow the Committee to gather additional information on how developments in the Middle East and other factors were affecting the economic outlook before determining whether adjustments to the policy rate would be warranted. One participant preferred to lower the target range for the federal funds rate by 25 basis points, noting concerns that the current policy stance was overly restrictive in a situation of downside risks to the labor market.

About the outlook for monetary policy, participants generally judged that the continued elevated inflation readings together with uncertainty related to the duration and economic implications of the Middle East conflict could necessitate maintaining the current policy stance for longer than previously anticipated.

Several participants highlighted that it would likely be appropriate to lower the target range for the federal funds rate once there are clear indications that disinflation is firmly back on track or if solid signs emerge of greater weakness in the labor market.

A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent. To address this possibility, many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the Committee's future interest rate decisions. Participants noted that monetary policy was not on a preset course and that future policy decisions would be made on a meeting-by-meeting basis.

In discussing risk-management considerations bearing on the outlook for monetary policy, participants assessed that both upside risks to inflation and downside risks to employment remained elevated. Participants generally observed that the conflict in the Middle East could have significant implications for the balance of these risks and for the appropriate path of monetary policy.

Several participants indicated that, in a scenario in which the conflict was resolved soon, rate reductions would be warranted later this year if the effects of higher tariffs and energy prices on inflation were to dissipate in line with their expectations.

Some participants expressed concerns, however, about a scenario in which sustained elevated energy prices, combined with the effects of tariffs, could result in inflation pressures becoming embedded more broadly, potentially de-anchoring inflation expectations and creating a greater tradeoff between the Committee's employment and inflation goals.

A few participants commented on issues related to the Federal Reserve's balance sheet and policy tools, including the role of SRP operations in the implementation of monetary policy and the connection between liquidity tools, liquidity regulations, and the demand for reserves.

Summary of Key Takeaways

Participants viewed the economy as resilient with solid growth and a stabilizing labor market, but they expressed heightened concern about inflation due to energy prices, tariffs, and the Middle East conflict (Iran war). They judged that uncertainty is high, with upside risks to inflation and downside risks to employment. Almost all supported holding the federal funds rate at 3.75–3.50%, seeing current policy as roughly neutral. Many wanted to remove the easing bias from the post-meeting statement, signaling greater openness to holding rates steady longer.

Inflation Views

Inflation has moved higher (both headline and core) and remains well above 2%.

·       Main drivers:

o Sharp rise in global energy prices.

o Elevated core goods inflation (partly from tariffs).

o Spillovers from fuel prices (transportation, shipping, airfares).

o Supply disruptions (fertilizer and other commodities).

o Price increases in the information technology/software sector.

·       Longer-term inflation expectations remain stable; near-term expectations have risen.

·       Outlook: High energy prices will pressure inflation in the near term. Tariff effects should fade later in 2026, but rates could rise further. Productivity gains and slowing housing services' prices are expected to help disinflation.

· Key risks: prolonged Middle East conflict, embedded inflation effects on wage/price setting after years above 2%, and possible de-anchoring of expectations. Most participants now see a greater risk that inflation returns to 2% more slowly than previously thought.

Labor Market Views

·       Unemployment rate stable near 4.3%; job gains low on average.

·       Most saw recent data (unemployment, layoffs, hiring, labor force growth) as evidence of stabilization, not weakness. Low job growth may simply match slow labor force growth.

·       Some signs of softness noted (sector concentration of jobs, lower survey job availability, and modest wage growth).

·       Outlook: Conditions are expected to remain stable in the near term, but risks are tilted to the downside. Businesses may delay/reduce hiring due to uncertainty or AI adoption; a drop in labor demand could push unemployment up sharply.

Economic Activity Views

·       Overall expansion at a solid pace.

·       Tailwinds: Robust business fixed investment (especially technology/AI), resilient consumer spending (supported by wealth and fiscal policy), productivity gains, and favorable financial/fiscal/regulatory conditions.

·       Headwinds: Higher energy and fertilizer prices (especially for lower-income households and farmers); low consumer sentiment.

·       Oil price effects on activity may be smaller than in past episodes due to high U.S. domestic production.

·       Significant uncertainty from Middle East developments.

Financial Stability Considerations

·       Asset valuations remain elevated → risk of sharp corrections.

·       Private credit sector: Investor redemptions noted; data gaps make risk assessment difficult. Potential for spillovers or credit contraction.

·       Hedge fund leverage in Treasury markets could amplify disruptions.

·       Cybersecurity risks highlighted, especially those linked to rapid AI developments.

· Discussion of liquidity tools (discount window, SRP, and swap lines) and possible longer extension of swap arrangements.

Monetary Policy Discussion & Outlook

·       Decision: Almost all participants supported no change in the target range. One dissented in favor of a 25 bps cut (citing downside labor risks).

·       Current policy is seen as within the range of neutral.

Outlook:

·       May need to stay restrictive longer than previously expected due to persistent inflation and geopolitical uncertainty.

·       Rate cuts are likely if disinflation resumes clearly or labor weakens significantly by late 2026.

·       Policy firming (rate hikes) could become appropriate if inflation stays persistently high by late 2026.

· Many preferred removing the “easing bias” language from the statement.

·       Decisions will remain data-dependent and meeting-by-meeting.

·       Risk management: Both inflation (upside) and employment (downside) risks are elevated. The Middle East conflict is the major driver of uncertainty and could shift the policy path significantly.

Conclusions

Overall, the April FOMC minutes show the Fed is extremely hawkish (cautious) about potentially hotter inflation amid the SOH/Iran deadlock and the energy price shock. On the other side, the Fed is also very much optimistic (hawkish) on potentially higher economic activities (real GDP growth) due to AI-led CAPEX & productivity stimulus and resilient consumer spending (tax cut stimulus and vibrant Wall Street wealth effect), despite higher energy & fertilizer prices, lingering Middle East tensions, and weak consumer sentiment.

The Fed is also moderately optimistic (hawkish) about a solid US labor market despite the average unemployment rate (4.3%) being almost 50 bps up from pre-COVID average levels (3.8%). But at the same time, the Fed is also concerned about lower labor force participation and job openings, although the Fed always sees 4.0% as the ‘yellow line’ for the unemployment rate and 96% as the sustainable longer-term maximum employment for the US economy.

Thus, the Fed may now be in ‘wait & watch’ mode at least until Q3CY26 and most probably on hold for the rest of 2026 despite some bytes in the FOMC minutes for a potential rate cut late in 2026. The Fed may have intentionally kept this ‘easing’ bias for a balancing approach, as some participants also played for rate hikes later this year.

The Fed is maintaining that there are upside risks in inflation and downside risks in employment. Theoretically, the Fed now has to bring down inflation by around 100 bps and the unemployment rate by 50 bps for pre-COVID levels and to achieve the dual mandate of maximum employment (~3.8%) and price stability (minimal core inflation ~1.9%-CPI+PCE). Thus, the Fed now has to maintain a neutral policy rate (neither stimulative nor contractionary) in an effort to bring down both inflation and the unemployment rate. The Fed is still viewing the present inflation spiral as purely transitory (Iran war, supply chain disruptions), but if it lingers beyond the next few months, the Fed may have to change its view, as it will transmit to the core inflation through various channels.