A surprisingly hawkish Federal Reserve report reveals a committee deeply divided on interest rates, yet Citi Research argues that markets have entirely misjudged the odds of a rate cut later this year.
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Fed Minutes Show 4 Dissents as Citi Cites Rate Cut Mispricing
The Federal Reserve held its policy rate steady at a range of 3.50% to 3.75% in April, but minutes from the meeting revealed the most significant internal division in over 30 years, with a growing number of officials open to hiking rates if inflation remains elevated.
"A majority of Fed policymakers at their April 28-29 meeting felt 'some policy firming would likely become appropriate' if inflation stays persistently above the central bank’s 2% target," Andrew Hollenhorst, an economist at Citi, said in a report reacting to the minutes. The release pushed the two-year Treasury yield to a 15-month high above 4.1 percent as traders pared back bets on future rate cuts.
The minutes detailed a fractured committee, with four dissents among the 12 voting members—the most since 1992. While one member, Governor Stephen Miran, voted for a cut, three others dissented over language in the policy statement that they felt still signaled an easing bias. The committee has not changed the policy rate since hiking in April 2025, and futures markets now price in only a 1.7 percent chance of a cut by June 2026.
Citi: Markets Overreacted to Hawkish Tone
Despite the minutes' hawkish tilt, analysts at Citi argue that investors have overreacted and are underestimating the case for rate cuts later in 2026. They believe the market has misinterpreted the stance of incoming Fed Chair Kevin Warsh, who, despite inheriting a more hawkish committee, is still expected by Citi to favor lower rates as inflation cools.
"We think the greater probability is that Warsh does not push for a cut at the June meeting but will continue to argue for eventually cutting the policy rate," Hollenhorst's report stated. Citi's baseline forecast projects the Fed will restart its cutting cycle in September, driven by a softening labor market and moderating inflation data. They argue that while headline inflation has been pushed up by the war in Iran and subsequent 50 percent surge in oil prices, core measures are closer to the Fed's 2 percent target than official data suggests.
The division sets the stage for a contentious first meeting for Warsh on June 16-17. Appointed by President Donald Trump, who has publicly called for lower rates, Warsh will need to build consensus among a committee where "many" participants, according to the minutes, wanted to remove any suggestion of future cuts from the official statement. The outcome will likely depend on whether upcoming inflation and employment reports show the economy is cooling enough to justify easier policy.
This article is for informational purposes only and does not constitute investment advice.
[1] FOMC Minutes Sound Hawkish Again, But Citi Strongly Supports Rate Cuts: The Market Has Misjudged Walsh[2] US Fed minutes show more policymakers open to a rate hike[3] Fed minutes reveal potential for rate hikes if inflation stays above target[4] Fed Signals Possible Rate Hikes if Inflation Remains High in 2026[5] Divisions awaiting Warsh to be on display in Fed minutes release
