Fed Minutes Flag Risk of Rate Hike Amid Inflation from Middle East Conflict
According to the minutes of the latest FOMC meeting, most Fed officials believe that some policy tightening may become appropriate if inflation remains above the 2% target. Meeting participants noted that high energy prices and the protracted Middle East conflict continue to exert upward pressure on inflation.
Fed Minutes: Rate on the Table, but Who's Really Pulling the Strings?
[The Gist]: What's Really Happening
The Fed has officially recorded in the minutes what had been whispered behind closed doors in New York and London for a month: the Middle East conflict is no longer an external shock but a systemic inflation factor that changes the entire math of monetary policy. Most FOMC members are open to a rate hike — not because the economy is overheating, but because the energy channel of inflation is blocked by geopolitics.
The average reader sees this as "the Fed fears inflation." An insider sees something else: the committee acknowledged that traditional tools (rates, balance sheet, forward guidance) no longer work in the old regime. Raising rates amid war is not about cooling demand. It's about trying to keep the dollar from depreciating internally amid capital flight from risky assets.
Timeline and Context
May 23, 2026 — release of the minutes from the April FOMC meeting. The key phrase that markets initially overlooked: "some policy tightening may become appropriate if inflation remains above target." Reminder: current US inflation as measured by the PCE index is expected at 3.8% year-over-year, with core at 3.2%. The Fed's target is 2%.
What happened before that?
- May 20: Brent broke through $105 per barrel on news of Iran's ultimatum regarding the Strait of Hormuz.
- May 21: The yield on 30-year US Treasuries approached 5.2% — a psychological threshold beyond which a repricing of all long-term assets becomes inevitable.
- May 22: Iran established the Persian Gulf Authority, essentially a private toll collector for passage through the strait. Not a military blockade, but an economic one — a far more insidious form of pressure.
The Fed recorded this in the minutes with a 3-4 week lag. But the real discussion in the committee took place on May 2-3, when March PCE figures showed acceleration and import price data jumped 1.7% month-over-month.
Who Wins and Who Loses
Winners:
- Large banks with short positioning on US debt (Goldman, JPM, Citi) — they hedged against rising yields in advance and are now reaping the rewards.
- Energy traders holding long positions on oil — the Fed minutes confirm that rates won't be cut, so the dollar won't drop sharply, but inflation won't go away either — an ideal scenario for a commodity supercycle.
- The US Treasury — higher rates attract foreign capital into debt securities, albeit at high yields. Emergency financing of military expenses (an aircraft carrier group in the Persian Gulf costs billions per day) becomes slightly less painful.
Losers:
- Ordinary US households. Real consumer spending fell 0.1% in April, and the savings rate dropped 1.5 percentage points over the year. A rate hike would crush mortgages and auto loans.
- Issuers of corporate bonds rated BBB and below. A 30-year yield of 5.2% is their new anchor. Debt refinancing will become impossible for many.
- Emerging markets, especially Turkey, Egypt, and Pakistan. A stronger dollar and high rates are the worst combination for their USD-denominated debt.
What the Media Isn't Saying
Non-obvious insight: The Fed is deliberately using the Middle East conflict as a pretext for tightening that is needed for domestic reasons unrelated to inflation.
This is about financial stability. In April 2026, the volume of repo transactions on the Fed's balance sheet fell below $200 billion — a critical minimum. This means liquidity in the US banking system is running out. Raising rates will attract funds back from money markets and money market funds into Fed reserves. This is not fighting inflation — it's preventing a settlement collapse.
Second: at closed-door meetings at the Institute of International Finance (IIF) on May 18-20, a scenario was discussed where the Fed raises rates but simultaneously launches an emergency QE-like program to support government debt. Yes, it sounds schizophrenic — raising rates and printing money at the same time. But that's exactly the hybrid regime being modeled now. The official minutes are silent on this, but unofficial consultations with primary dealers are already underway.
Forecast: Next 30 Days and 90 Days
30 days (by end of June 2026)
- The Fed will not raise rates at the June meeting (June 11-12), but will sharply tighten rhetoric. A signal of "readiness to act" will be given.
- The 10-year Treasury yield will remain in the range of 4.7% – 5.0%. The spread between 2-year and 10-year yields will remain inverted (currently minus 40 bps) — a reliable indicator of recession within the next 9-12 months.
- Brent crude will correct to $95-98 on a temporary easing of US-Iran rhetoric, but without a full agreement.
90 days (by end of August 2026)
- A 0.25% rate hike at the July or September meeting. Probability: 70% if PCE inflation remains above 3.2%.
- The first time in history the Fed raises rates amid a hot war involving a major oil exporter. This will change the valuation rules for growth stocks (tech, semiconductors) — they will be repriced another 15-20% lower.
- Strait of Hormuz: by August, either a temporary agreement with Iran will be signed (40% probability), or the US will launch a limited strike on Iranian boats (35% probability). In either case, oil will either go above $120 or below $85 — a binary scenario.
Editorial Forecast
Asset: Brent crude. Direction: moderate rise in the next 24-72 hours to $107-109 per barrel. Key levels: support at $102, resistance at $111 (weekly psychological high). Confidence level: medium (55%). Main risk: a sudden breakthrough in US-Iran negotiations — even a rumor of lifting 10% of sanctions would send Brent to $92 within 6-8 hours.
The editorial opinion is analytical in nature and does not constitute individual investment advice.
— Editorial Team
