Fed Minutes Hint at Hikes — Are June Rate Cuts in Jeopardy?

The Federal Reserve’s latest minutes did little to disrupt rate-cut expectations embedded in CME Fed funds futures, but they did remind investors that the inflation fight is not officially over. While markets continue to price in potential rate cuts beginning around the June and September meetings, equity traders have become more sensitive to the possibility—however small—of the Fed pivoting in the opposite direction if inflation proves sticky. That nuance, rather than a wholesale shift in policy outlook, has been the key takeaway.

The January 27–28 meeting minutes showed that almost all participants favored holding rates steady, with only a couple preferring an immediate cut. Policymakers broadly agreed that inflation remains somewhat elevated and that economic activity is expanding at a solid pace. Labor market conditions were described as stabilizing, with downside risks diminishing. In short, the Fed sees an economy that does not require urgent easing.

However, what caught traders’ attention was the “two-sided” risk discussion. Several participants said they would have supported language explicitly acknowledging that rate hikes could be appropriate if inflation remains above target. This was not the consensus view, but it underscores a meaningful internal concern: progress toward 2% may be slower and more uneven than expected. Most participants judged the risk of inflation running persistently above target as “meaningful.”

Despite that language, market-based expectations barely budged. CME Fed funds futures continue to lean toward cuts later this year, and Treasury yields were relatively stable following the release. The staff outlook was revised modestly higher for growth, with inflation forecast slightly higher and unemployment expected to decline gradually starting in 2026. That combination—solid growth, sticky inflation, stable labor—does not scream imminent easing, but it also does not point toward immediate tightening.

Several Fed officials have added more current commentary this week that helps frame the debate. Governor Michael Barr has struck a cautious tone. He emphasized that the Fed can “afford to take its time,” wants more evidence that inflation is ebbing to 2%, and still sees a “significant risk” inflation remains above target. Barr also described the labor market as balanced but vulnerable to shocks, characterizing it as a “low hire, low fire” environment that lacks dynamism.

Barr’s commentary on artificial intelligence has also been notable. He suggested AI investment is “wildly indifferent” to the Fed’s rate target and unlikely to directly lead to lower interest rates. While he views AI as positive for productivity in the long run, he also acknowledged structural labor risks and uncertainty about whether AI disruptions are cyclical or structural. His message overall leans hawkish on inflation vigilance but patient on policy action.

Chicago Fed President Austan Goolsbee, often considered more dovish historically but hawkish recently, sounded measured but firm on inflation. He noted that services inflation is “not tame” and that some recent favorable headline readings were influenced by base effects. While he left room for “several more” rate cuts in 2026 if progress resumes, he made clear he wants evidence inflation is headed back to 2%. His framing of a 3% policy rate as a “loose” estimate of neutral suggests that the current stance may not be deeply restrictive.

San Francisco Fed President Mary Daly offered a somewhat softer tone. She described policy as “modestly or slightly restrictive” and estimated there may be roughly 75 basis points to go before reaching neutral. Daly acknowledged inflation remains above target and that households feel stretched, but she also highlighted cautious optimism among businesses and stabilization in the labor market. Her emphasis on ensuring that labor vulnerability does not turn into fragility places her more on the dovish end of the spectrum.

Equity markets have slid lower since the minutes release, but interpreting that move is complicated by today’s VIX expiration. VIX options settlement can create mechanical flows in S&P 500 derivatives as dealers adjust hedges tied to volatility exposure. That unwind can amplify intraday swings and obscure the true directional signal. Importantly, neither yields nor Fed funds futures have shown a meaningful repricing toward hikes, reinforcing the view that equities are reacting more to positioning and technical factors than to a genuine policy shock.

The key issue for markets now is messaging risk. The minutes introduced the concept—however minor—of rate hikes being possible if inflation remains elevated. That does not represent the base case, but it will likely prompt reporters to press Fed officials in coming speeches and interviews. Any repetition of that conditional language could weigh on risk assets, even if actual policy remains unchanged.

At the same time, the broader framework has not shifted dramatically. Policymakers generally expect inflation to trend down, growth to remain solid, and labor markets to stabilize. The debate is about timing and confidence, not direction. Most officials appear comfortable holding steady for now, watching data, and preserving flexibility.

In sum, the current Fed sentiment is best described as patient but vigilant. Rate cuts later this year remain plausible if disinflation resumes convincingly, but policymakers are unwilling to declare victory prematurely. The introduction of two-sided risks serves as a reminder that the inflation fight is conditional, not complete. For markets, that means volatility around data releases and Fed commentary will likely persist, even if the broader path still points toward gradual normalization rather than renewed tightening.