Minutes from the latest Federal Reserve meeting, released on Wednesday, showed that most policymakers believe interest rate hikes may become necessary if the war with Iran continues to fuel inflation.

Although the Federal Open Market Committee once again kept its benchmark interest rate within a range of 3.5% to 3.75%, the meeting saw four dissenting votes, the highest number of objections since 1992, reflecting deep divisions over the future path of monetary policy.

The debate focused heavily on the impact of the Iran war on prices and how that should shape monetary policy decisions. Officials also disagreed over how long the conflicts inflationary effects may persist and whether the post-meeting statement should continue signaling a bias toward rate cuts as the most likely next move.

While several participants said rate cuts would become appropriate once inflation clearly moves back toward the Feds 2% target or if the labor market weakens, the minutes stated that a majority of participants nevertheless emphasized that tighter monetary policy could become appropriate if inflation remains persistently above 2%.

Three of the four dissenting votes came from regional Fed bank presidents who argued that the central bank should keep the door open to further rate hikes amid the current inflation wave.

Although they agreed with holding rates steady, they objected to retaining language in the statement referring to additional adjustments in interest rates, wording widely interpreted as implying that the next move would likely be a rate cut.

The minutes noted that many participants preferred removing language in the statement that implied an easing bias regarding the likely direction of future interest rate decisions.

However, in Federal Reserve terminology, the word many does not necessarily mean a majority, which is why the wording remained unchanged in the official statement.

Officials broadly agreed that the conflict with Iran would have significant implications for the Feds efforts to achieve its dual mandate of full employment and price stability, although disagreements persisted regarding how long the wars inflationary effects may last.

The minutes stated that the vast majority of participants indicated that the risk had increased that inflation could take longer to return to the committees 2% target than previously expected.

The Kevin Warsh challenge

The meeting came under unusual circumstances, as it was the final meeting chaired by Jerome Powell as head of the committee. It also coincided with intensifying inflationary pressures driven largely by the war, alongside other factors that pushed policymakers to remain cautious about the future direction of monetary policy.

Former Fed Governor Kevin Warsh is set to assume leadership of the Federal Reserve following a lengthy selection process that reportedly included as many as 11 candidates.

US President Donald Trump clearly selected Warsh with the expectation that the Fed would cut interest rates.

However, market pricing now suggests the next move by the Fed is more likely to be a rate hike, whether in late 2026 or early 2027.

Inflation had been moving toward the Feds 2% target throughout 2025 and into the beginning of this year, but the war changed the equation as energy prices surged sharply, pushing most inflation indicators back above 3%.

Central bankers typically look through supply-side shocks such as rising oil prices on the assumption they are temporary. However, core inflation which excludes food and energy has also continued to rise.

Goldman Sachs expects the Feds preferred inflation gauge to show annual growth of 3.3% in April when data is released next week.

The challenge facing Kevin Warsh will be convincing fellow policymakers that productivity gains driven by artificial intelligence applications could create deflationary effects strong enough to offset the temporary impact of higher energy costs.

One of those colleagues will be Jerome Powell himself, who has decided to remain on the Federal Reserve Board of Governors.

Powell still has two years remaining on his board term and said in April that he would remain for a period to be determined later, repeating an earlier statement that he would stay until these investigations are fully concluded.

No Federal Reserve chair has remained on the Board of Governors after stepping down as chair in nearly 80 years.