Federal Reserve Chair Jerome Powell delivered measured remarks on Wednesday, signaling that policymakers are in no rush to cut interest rates despite softening headline inflation — a posture that sent equity markets into a brief tailspin before a partial recovery into the close.
What the Minutes Revealed
The May FOMC minutes, released at 2:00 PM ET, showed unanimous agreement among committee members that current monetary policy remains "appropriately restrictive" and that confidence in a sustained return to the 2% inflation target has not yet been established. The language was notably more cautious than the March release, which had hinted at a more dovish pivot later in the year.
Services inflation — which strips out shelter and energy — remained the primary sticking point. The trimmed mean PCE, a measure favored by several regional Fed presidents, registered 3.1% year-over-year in April, down only marginally from 3.3% in February.
"We are not yet confident that inflation is on a sustainable path back to 2%. The data must guide us, and the data has been uneven."— Jerome Powell, Federal Reserve Chair
Market Reaction
The S&P 500 fell as much as 0.8% in the 30 minutes following the release before recovering to close down 0.3%. Rate-sensitive sectors bore the brunt: utilities fell 1.4%, real estate investment trusts dropped 1.1%, and regional banks slid 0.9%. The 2-year Treasury yield — the most sensitive to near-term Fed expectations — rose 8 basis points to 4.92%.
Fed funds futures markets, which had priced in approximately 2.5 rate cuts for 2026 heading into the session, repriced to 1.8 cuts by day's end. The first cut is now expected no earlier than September, down from a July expectation held as recently as three weeks ago.
Dissenting Views Within the Committee
While the vote to hold rates was unanimous, the minutes revealed notable variation in the committee's forward-looking assessments. Three members expressed concern that holding rates too high for too long risked unnecessary labor market deterioration, pointing to a rising unemployment rate of 4.1% and slowing job openings data. Two other members pushed back, arguing that premature cuts risked a second inflation wave analogous to the 1970s experience.
What Comes Next
The next major data prints will be the May CPI release on June 11 and the May employment situation report on June 7. Fed officials have indicated these two data points will be critical inputs for the June 18 FOMC meeting. A surprise on either front — particularly a hot CPI or a weak jobs number — could significantly alter the calculus.
CFR's baseline scenario remains a single 25 basis point cut in Q4 2026, most likely at the October or December meeting. We assign a 30% probability to no cuts this year and a 15% probability to two cuts if labor market conditions deteriorate faster than the committee currently projects.
Margaret Holloway
Senior Economics Correspondent
Margaret covers the Federal Reserve, macroeconomics, and fiscal policy for CFR. She previously reported for Reuters and the Financial Times Washington bureau. She holds an M.Sc. in Economics from the London School of Economics.
