Federal Reserve Mouthpiece: Intense Internal Power Struggles, Can the Dovish Rate Cut Stance Be Maintained?

Author: Wu Yu, Jintou Data

The Federal Reserve’s two-day policy meeting will conclude in the early hours of Thursday Beijing time, the last meeting led by Powell before he steps down as Chair. The market widely expects the Fed to keep rates on hold; the question is whether policymakers will hint that the rate-cut plan has gone off track or merely been delayed.

In an article, Nick Timiraos— a reporter for The Wall Street Journal, often dubbed the “mouthpiece of the Federal Reserve”—pointed out that, currently, the energy shock caused by the Iran war, layered on top of multiple supply disruptions, has once again heightened the risk of stagflation. The Fed will very likely keep the benchmark interest rate unchanged at 3.5% to 3.75%; meanwhile, intense internal debate is under way over adjusting policy wording and charting the path for rate cuts.

Timiraos recalled that two years ago, when the U.S. economy was growing steadily and inflation was falling, Powell had responded to questions about stagflation in a humorous tone. With a straight face, he said, “In fact, I’ve neither seen ‘stagnation’ nor seen ‘inflation.’”

At the time, stagflation was only a theoretical risk, and there was still room for policy adjustments to be reversed. But today, the energy shock stemming from the Iran war has brought that risk back to the forefront—U.S. inflation has failed to return to the Fed’s 2% target for five years, and the specter of stagflation in the 1970s is no longer far away.

Currently, the U.S. is experiencing the fourth supply shock within five years, including: the reopening of the economy after the pandemic, the Russia-Ukraine conflict, “tariff wars,” and the Middle East war ongoing now.

Timiraos said that while each of the shocks above can be viewed as “one-off events” that do not require an excessive policy response, the cumulative effects have made Fed officials highly vigilant. Especially the Trump administration’s tariff policy, which has long started to test whether businesses and consumers are willing to bear higher prices.

Fed internal rate-cut expectations cool

Timiraos noted that Fed officials are wrestling with whether weak job growth is overstating the fragility of the labor market—if slower immigration reduces the economy’s ability to absorb jobs, the current level of job growth may already be sufficient.

Previously, Fed Governor Waller—who supported last year’s three rate cuts due to concerns about the labor market—has this month shifted toward warning about inflation risks. Looking back on the 1970s, he warned, “We have to be wary of this series of one-off shocks. Expectations matter, and at some point, we may have to respond.”

Although the Iran war has achieved a ceasefire, the Strait of Hormuz remains under an effective blockade in practice, and jet fuel prices have surged. Fed officials expect that returning inflation to the 2% target will still take at least a year. Waller said bluntly: “We’ve been saying we want to keep inflation at 2%, but five years have passed and we’ve never achieved it. At what point will people start doubting our commitment?”

Earlier, some officials discussed restarting rate cuts this year to offset the automatic tightening effect brought by ‘inflation falling while rates remain unchanged,’ but that idea has now been shelved. On April 16, New York Fed President Williams told reporters, “Right now, we are not in that situation. On the contrary, inflation is rising.”

However, Timiraos also said that compared with the 1970s, the U.S. economy has changed, making a full replay of stagflation less likely, and the Fed’s focus on inflation expectations is far greater now than it was then. As Williams defined the Fed’s current policy stance as a “deliberate choice rather than a passive response,” he clearly stated: “Our monetary policy is in the right place, and that’s exactly the state we want.”

Will the Fed policy statement change?

Timiraos said that, currently, the bigger issue facing the Federal Reserve Board is whether to modify the formal statement to suggest that rate cuts are no longer under consideration—historically, changes in policy wording have been at least as important as changes in interest-rate decisions.

Since the end of last year, the statement has kept the wording that the “next policy action is more likely to be a rate cut rather than a rate hike.” In the past two meetings, a handful of officials have wanted to remove that language; doing so would mean that the possibilities of rate cuts and hikes are treated as equal.

These officials believe inflation is moving in the wrong direction; with shocks continuing to accumulate, it is becoming increasingly difficult for inflation to return to 2%. Meanwhile, the labor market remains steady, and the stock market has rebounded to record highs—factors that do not align with some officials’ reasons for supporting rate cuts.

However, Timiraos also pointed out that the committee’s mainstream view is that such an adjustment would be too aggressive—formally revising the wording itself would tighten financial conditions, a hawkish move that officials are not yet ready to make. As Williams—Powell’s core ally—said, “We don’t need to provide strong forward guidance, and we’re not doing that right now.”

Timiraos said that officials will discuss this issue again during the week. Notably, the committee’s thinking sometimes moves faster than its wording changes. Before the committee formally revises the policy statement, officials may communicate the policy direction in more subtle ways—for example, through Powell’s press conference, speeches by officials in May, or the forecasts released at the next meeting in mid-June.

However, by then, the committee will likely be led by Waller, the former Fed governor nominated by Trump to succeed Powell, and the decision on whether and how to formally adjust the Fed’s policy guidance may fall to Waller, whose views on this issue may differ.