Fed officials shift stance, hinting at a potential rate hike

Article by: Long Yue

Source: Wall Street Journal

Policymakers within the Federal Reserve who previously advocated for rate cuts, including Waller, have recently signaled that they no longer rule out rate hikes, leaving almost no one on the committee still calling for a reduction. Wessel’s debut as chair may signal that the Fed’s next move could be a rate increase.

Trump appointed him to cut rates, but soon after he took office, colleagues began discussing rate hikes.

The Wall Street Journal recently published an in-depth report by veteran journalist Nick Timiraos, timed just before the Federal Reserve’s new chair, Kevin Warsh, presides over his first interest rate meeting. Timiraos, who has long specialized in Fed coverage, is regarded by markets as a “Fed spokesperson.”

Timiraos wrote that Wash entered the meeting room at an extremely awkward moment. He had publicly advocated for interest rate cuts last year, a stance that earned him Trump’s favor. However, shortly after his official appointment, the direction of discussions within the Federal Reserve had quietly reversed—from “when to cut” to “whether to raise.”

This reversal did not happen suddenly. This year, U.S. inflation has risen rather than fallen, surpassing 3%; the labor market has regained strength; supply bottlenecks driven by the AI infrastructure boom and rising oil prices due to the Iran conflict continue to fuel price pressures. The reasons that previously supported expectations of rate cuts have disappeared one by one.

Wash faced a committee he did not personally assemble, a forecasting tool he had long criticized, and a policy direction that contradicted the president who appointed him. This debut was bound to be difficult.

The most telling indicator is the shift in attitude by Federal Reserve Governor Christopher Waller.

Last year, Waller was concerned about a weakening labor market and even voted in favor of a rate cut in January, despite opposition from most of his colleagues. But last month, he publicly stated that the latest data “has pushed me in another direction.” He clearly supported removing the “accommodative bias” from the statement and bluntly said, “I can no longer rule out the possibility of raising rates at some point in the future.”

Regarding ongoing market discussions about a September rate cut, Waller’s response was straightforward: “As a serious central bank official, you cannot seriously talk about this.”

If Waller represents a shift toward the dovish camp, then changes by理事 Lisa Cook indicate that even the "middle ground" is shifting.

Cook is not a hawk; last month, she still said that maintaining interest rates was the right choice, and the baseline scenario remained that inflation would ease on its own. But she added a caveat—one that would have been nearly unthinkable for her a year ago: she said that if the decline in inflation "does not materialize in a timely manner," she is "prepared to raise rates."

The underlying concern is that five years of inflation consistently above target may have begun to influence how businesses and workers set prices and negotiate wages, creating self-reinforcing expectations.

The hawks on the committee have long been dissatisfied.

At the end of last year, when the Federal Reserve cut interest rates, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari dissented from the decision, arguing that the rationale for easing was unfounded.

In April this year, the three teamed up again, this time objecting not to the interest rate decision itself, but to the wording in the statement suggesting that a rate cut was "more likely next"—they demanded its removal to indicate that another rate hike remained a possible option.

Today, the data further tilts in their favor. Hamark stated this month that maintaining the current stance is reasonable, “but if recent trends continue, action may be needed soon.” Logan went further: “I am increasingly concerned that interest rate hikes may be necessary later this year.”

Policymakers have also raised a noteworthy point: as inflation rises, the inflation-adjusted "real interest rate" is actually falling, meaning the Fed’s policy may be less restrictive to the economy than the raw numbers suggest. In other words, simply standing pat is, in a sense, already accommodative.

This Wednesday, the Federal Reserve is expected to keep the benchmark interest rate unchanged at 3.5% to 3.75%. But the real focus lies in two areas.

First, the wording of the statement. The phrase "accommodative bias," which has been in place for months and suggested that a rate cut was more likely next, is expected to be removed, implying that the chances of a rate cut and a rate hike are now considered equal.

Second, the quarterly dot plot. In March, more than a dozen officials anticipated at least one rate cut this year. This time, most officials are expected to indicate that rates will remain unchanged for the year, with some even marking rate hikes on the chart.

Wash has long criticized the Fed’s overreliance on “forward guidance,” including tools like the dot plot. He could choose not to submit his own forecasts or remove such implications from official statements. But Timiraos points out that this operational distinction matters little to investors—they read right through to the substance. The only one who truly cares about this distinction is the president who wants to see lower interest rates.

Last month, Chicago Fed President Austan Goolsbee captured the current situation best when he said: “We now face a fairly serious inflation problem developing, but the labor market remains essentially stable.”

The result is that almost no one on the committee is still advocating for rate cuts. Wash’s debut may signal that the Fed’s next move could be a rate hike—delivered through the very tool he has long criticized and by a committee he did not select, steering policy in a direction his appointers never wanted.