Fed minutes raise specter of rate hikes. This is what it means for advisors

Advisors have become accustomed to the Federal Reserve’s strategy of holding rates steady in recent months, but rate hikes are still very much on the table, according to the minutes of the latest Fed meeting.

Last month the Federal Reserve stuck to its path of keeping its policy rate steady at 3.5% to 3.75%, despite sustained pressure from President Donald Trump to lower rates. The Fed made its last rate cut in December.

But minutes from the Federal Open Market Committee’s April meeting, released Wednesday, raised the possibility of rate hikes amid inflationary pressures.

“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,” the minutes said. “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.”

The meeting, which was described by Reuters as “the most divided” in a generation, saw Fed Governor Stephen Miran once again emerge as a dissenting voice as he pushed for a quarter percentage point reduction. There were also other divisions - three of the 12 FOMC members, while expressing their support for maintaining the target range rate, did not support the inclusion of an easing bias in the statement.

April’s Fed meeting was also the last for Jerome Powell as chair. His successor, the former Fed governor and Trump pick, Kevin Warsh, was confirmed last week. Warsh will be sworn in as Federal Reserve Chair on May 22, Reuters reports.

The Fed minutes are a reminder that inflation remains the main concern and that rate hikes are still on the table if price pressures stay elevated, according to Gina Bolvin, president of Bolvin Wealth Management Group.

“Investors had grown comfortable expecting eventual cuts, but today’s release reinforced the Fed’s ‘higher for longer’ stance,” she said in a statement.

“For investors, this is a reminder to focus on quality — companies with strong balance sheets, pricing power, and durable earnings should continue to outperform in a higher-rate environment,” she added.

In research released this week, Charles Schwab analysts noted that inflation is running above 3% annually, well above the Fed's goal of 2%, making rate cuts harder for Warsh to implement.

"We assume he’ll try to have a lower rate bias, but inflation above 2% will make that difficult," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

Charles Schwab’s research pointed to the CME’s FedWatch tool, which currently shows that a rate hike is much more likely than a cut. The latest tool data show that, with a current target rate range between 3.5% and 3.75%, the futures market is pricing in a 50.9% probability that this won’t change through the Fed’s December 2026 meeting. The probability of an increase to between 3.75% and 4% is 36.9%, and an increase of 4% to 4.25% has a probability of 9.5%. A cut to between 3.25% and 3.5% has a probability of just 1.6%.

In a note released earlier this week, Morgan Stanley said that it expects the Fed to stay on hold through the rest of 2026, with two cuts coming in March and June 2027.