Three major Federal Reserve voting members "oppose rate cuts," prompting a sharp drop in short-term U.S. Treasury bonds, with the interest rate market expecting the Fed to "raise rates" in 2027.

Three major Federal Reserve voting members "oppose rate cuts," prompting a sharp drop in short-term U.S. Treasury bonds, with the interest rate market expecting the Fed to "raise rates" in 2027.

Behind the Fed's decision to stay put, a rare internal split is reshaping the market’s outlook on the interest rate path.

According to a Wall Street CN article, the Fed kept rates unchanged on Wednesday, but four dissenting votes emerged in the decision. Among them, three regional Fed presidents—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—explicitly opposed preserving the “easing bias” wording in the statement, catching the market off guard.

The two-year US Treasury yield jumped about 11 basis points in a single day to 3.95%, marking the largest single-day increase on a Fed decision day since January 2022; the 30-year yield broke through 5%, the first time since 2025. Meanwhile, the interest rate swap market has priced in a 50% probability of a Fed rate hike in 2027.

This bond market selloff is not an isolated event. Analysts note that the continued tensions in the Middle East and prolonged Hormuz Strait blockade have driven up oil prices sharply, inflating inflation expectations and planting early pressure on the bond market. The hawkish dissent of the three voters further reinforces the market signal—the Fed's consensus on the rate cut path is collapsing, and the policy balance is tilting toward “maintaining high rates for longer” and even “not ruling out rate hikes.”

Short-end yields drop first, 30-year break above 5% raises alarm

The bond selloff is concentrated at the short end, with the two-year yield most sensitive to Fed policy expectations, rising about 11 basis points in a single day to 3.95%, the largest single-day move for a Fed decision since 2022.

The 30-year yield breaking above 5% has also attracted significant market attention. Analysis suggests 5% is seen by some investors as a “psychological barrier” for the long-term bond market; though it was breached twice in 2023 and 2025, neither lasted for more than a few trading days.

TD Securities’ U.S. Rate Strategy Chief Gennadiy Goldberg said 5% is “a psychological threshold that often reignites concerns about bond vigilantes and future higher rates.”

John Briggs, North America Rate Strategy Chief at Natixis, noted that the spike in front-end yields is the market’s acknowledgment that a prolonged Hormuz Strait blockade will keep energy prices high, and the Fed’s overall stance has clearly turned more hawkish, amplifying this move.

Interest rate swaps pricing: Staying put this year, rate hike possible in 2027

Behind the bond market volatility, pricing in the interest rate derivatives market has quietly undergone a structural shift.

Current implied path in the interest rate swap market: The Fed will keep rates unchanged for the rest of this year, with a 50% probability of a rate hike in 2027. This stands in stark contrast to pre-war market expectations that priced in more than two rate cuts this year.

JP Morgan Asset Management Portfolio Manager Priya Misra said, the three dissenting votes send a signal that FOMC members differ strongly on risks on both sides of the dual mandate and policy responses. The market selloff “is pricing in higher oil prices and the relatively low bar for hikes revealed by the dissent.”

Subadra Rajappa, U.S. Research Chief at Societe Generale, said,

“The dissent was clearly unexpected for us and the market, and may lay the groundwork for dropping the easing bias in future meetings.”

She also noted that Kevin Warsh, Trump’s nominee for the next Fed Chair—who has received Senate Banking Committee support on Wednesday—faces significant challenges in building consensus in this increasingly hawkish-dovish split committee.

Oil prices & geopolitics: Core variables for inflation expectations

The root of this round of bond market pressure lies in the surge in oil prices caused by the Iran war and its sustained impact on inflation expectations.

The Hormuz Strait is a key global oil transport route; its ongoing blockade has pushed up gasoline prices and driven inflation expectations higher. Against this backdrop, the market largely believes that the rate cut path priced in before the outbreak of war is unlikely to be realized.

George Goncalves, U.S. Macro Strategy Chief at MUFG, said the dissent votes seeking removal of easing bias is a compromise, and makes Warsh’s future leadership of committee consensus more complicated.

Bloomberg Macro Strategist Sebastian Boyd noted,

“Rate traders spent all day pricing in a more hawkish path as oil rose, and the split vote shows the committee is increasingly aligning with the market. Frankly, traders are not taking the easing bias seriously now, but if a peace deal is struck between the US and Iran, this view would quickly change.”

Four dissenting votes, sharply opposing directions

There were four dissenting votes in this FOMC decision, but the reasons point in two opposite directions, reflecting deep divisions within the committee.

Fed Governor Stephen Miran voted in favor of a 25 basis point rate cut. Since his appointment by Trump last year, he has voted for a cut at every FOMC meeting. Earlier this month, Miran said the Fed could cut rates three to four times this year, “I still don’t see sufficient reason to keep waiting,” he said on April 16.

In sharp contrast to Miran, Hammack, Kashkari, and Logan supported maintaining rates but opposed keeping the “easing bias” language in the statement, which signals potential future rate cuts.

The logic shared by the three is: The Iran war and continued Hormuz Strait blockade pushing up energy prices is increasing upward inflation risk, and the policy statement should not preset an easing direction.

Hammack previously stated clearly that there are two-way risks to rates, “Depending on where the data go, we may need to be more accommodative, or more restrictive.”

Kashkari said in March that geopolitical events make this year’s policy path more uncertain, “It’s too early to judge the impact on inflation and its duration.”

Logan also warned that if the Hormuz Strait blockade continues, the economic shock will be more profound.

Risk Warning and DisclaimerThe market involves risk and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situation or needs of individual users. Users should consider whether any opinions, views or conclusions in this article fit their specific circumstances. Investing accordingly is at your own risk.