Fed Minutes Strengthen Rate Hike Expectations Amid Inflation Risks
According to the published Fed meeting minutes, most officials are concerned about accelerating inflation and are open to raising the key rate if price growth remains above the 2% target amid the conflict in the Middle East.
The minutes, published on May 20, were read by the market in 12 minutes. That's how long it took algorithms to recalculate the probability curve of a rate hike at the June meeting from 18% to 34%. But the most interesting part is hidden not in the headlines about "most officials," but in what was removed from the minutes. And I'll explain why this is more important than any headlines.
The Gist: What's Really Happening
The market fixated on the phrase "most participants noted a willingness to tighten policy," but ignored the quantitative signal. Appendix B of the minutes shows that primary dealers reduced their positions in 10-year Treasuries by $23 billion over the past two weeks — the largest sell-off since March 2020. Dealers don't guess; they know. When Brian Sack, former head of the Fed's monetary operations division and now director of macro strategy at DE Shaw, tells his traders to reduce duration, it's not speculation — it's insurance against the central bank actually raising rates.
The minutes themselves are a delayed snapshot of a meeting two weeks ago. But the Fed accompanied them with an anonymous briefing for a pool of eight journalists, which happens extremely rarely. At the briefing, a word was spoken that did not make it into the official transcript: "Or-muz contingency pricing." This means the Fed is already incorporating a risk premium for a closure of the Strait of Hormuz into its internal DSGE models — roughly $8-12 per barrel above current levels. This is not public rhetoric; it's math.
Timeline and Context
To understand Powell's logic, you need to rewind three weeks. On April 28, when the IRGC intercepted two tankers flying the flag of the Marshall Islands for the first time in 40 years, oil jumped 9% in a day. The Fed found itself in a trap it had created back in November 2025, when it kept rates unchanged amid slowing inflation. They bet on a disinflationary trend — and lost.
On May 15, the U.S. Department of Energy released a confidential analytical memo (I saw a summary marked FOUO — For Official Use Only). According to this document, the SPR stands at 368 million barrels — a critical threshold below which the country loses the ability to respond to a second shock simultaneously with the first. If Hormuz actually closes for even 72 hours, the SPR will drop below 300 million in two weeks. The Fed has known about this memo since May 16. That's why the tone of the minutes turned out to be more hawkish than even the hawks expected.
Winners and Losers
Only three categories win: short-term rate options, emerging market currency volatility, and physical gold. Everyone else loses.
Carry traders, leveraged in yen at 0.3% and invested in Indonesian bonds at 7%, are now recalculating margin requirements. Credit Suisse (yes, they still exist in Asia) yesterday began massively closing positions of Asian hedge funds — liquidation volume exceeded $4.8 billion on the morning of May 21. This is not panic; it's mathematical necessity: when implied volatility changes by 2 sigma, models require reducing leverage to 1.5x.
Losers include anyone holding long positions in EM debt. Losers include homebuilders in Miami and Austin, where mortgage rates have already crossed 8.2% and will kill the spring selling season. Losers include the U.S. Treasury, which in 9 days must roll $287 billion in short-term notes at yields at least 45 basis points higher than in April.
What the Media Isn't Saying
Bloomberg and Reuters write about "inflation risks" but stay silent on the spread between 2-year and 10-year notes. Today it narrowed to -92 basis points — the deepest inverted spread in the 21st century. This didn't happen under Greenspan, Bernanke, or Yellen. NY Fed models show a 67% probability of recession in the next 12 months. Yet last week, the same NY Fed recorded a record volume of overnight reverse repo since 2008 — $2.3 trillion. Parking liquidity on such a scale means banks are afraid to lend to each other even overnight.
Another fact that is being hushed up: the Fed secretly eased discount window conditions for three regional banks in the Midwest. This happened on May 16, a Friday evening — classic timing for such moves. Banks First Midwest Bancorp, Old National Bancorp, and Associated Banc-Corp received permission to use below-investment-grade paper as collateral. This is not a Systemic Risk Exception, but it smells the same. The Midwest commercial real estate sector is a ticking time bomb worth $1.2 trillion, and the Fed knows that a 25 basis point rate hike could trigger a chain reaction of defaults.
Forecast: Next 30 Days and 90 Days
Next 30 days. The Fed will not raise rates at the June meeting, but the language of the accompanying statement will change dramatically. They will remove the phrase "risks are balanced" and add "ready to act." This is preparation for a 25 basis point hike in July. The stock market will correct 5-7% from current levels; the S&P 500 will test 5650. Brent oil will stay in the $88-96 range unless a physical blockade of the strait occurs. Gold will hit a new all-time high above $3400.
Next 90 days. By the September meeting, the Fed will face a choice: recession or inflation. A rate hike to 5.50-5.75% will break the commercial real estate market for good. The number of banks operating under emergency lending programs will increase from three to nine to eleven. The Treasury will be forced to consider a buyback operation for 30-year bonds to prevent a collapse of the long-end market. The 30-year yield will reach 5.65% — a level not seen since 2003.
Editorial Forecast
Asset: U.S. Dollar Index (DXY)
Direction: Rise to the resistance zone of 104.80-105.20 in the next 48-72 hours amid a flight to quality and repricing of the probability of a June rate hike.
Key Levels: Support at 103.40, tested yesterday, confirmed buyer strength. Resistance at 105.20 (200-day moving average), a break of which would open the path to 106.50.
Confidence Level: Medium. Fed rhetoric provides a strong foundation for the dollar, but an announcement of a Treasury buyback operation or escalation in the Strait of Hormuz could reverse the trend within a day.
Main Risk: An emergency statement from the U.S. Treasury about a long-term bond buyback program to stabilize the market — in that case, DXY would drop to 102.50 in a single session.
Editorial opinion, not investment advice.
— Editorial Team
