Fed's Voice: Key Turning Point in Interest Rate Path, Moving Towards Neutral Stance

On May 2, Nick Timiraos, known as the ‘voice of the Fed,’ pointed out that the internal debate regarding the interest rate path at the Federal Reserve has reached a critical turning point—officials are no longer arguing about when to resume rate cuts, but are beginning to explore the conditions under which rate hikes may be necessary. In a statement following Wednesday’s policy meeting, Dallas Fed President Logan, Cleveland Fed President Harmack, and Minneapolis Fed President Kashkari formally expressed dissent against retaining language suggesting that ‘the next step is more likely to be a rate cut.’ Outgoing Chair Powell acknowledged that the committee had ‘vigorous discussions,’ and although for procedural reasons the relevant guidance has not yet been removed, he clearly stated that the committee’s stance is shifting from accommodative to neutral, admitting that the arguments of the dissenters ‘are entirely valid.’ This statement indicates that the Fed has partially moved from signaling rate cuts to a neutral wait-and-see phase. The core factor driving this shift is the sustained energy shock caused by the substantial closure of the Strait of Hormuz. Unlike past one-time price fluctuations that could self-correct, this supply chain disruption may lead to elevated energy costs for months, enough to permeate broader prices and raise inflation expectations. In a speech on Friday, Kashkari further outlined a scenario for rate hikes: if the Strait does not quickly resume navigation, a series of rate hikes may be necessary, even at the cost of further weakening the labor market. Former Fed senior economist William English pointed out that keeping the federal rate unchanged during rising inflation effectively amounts to passive easing, which becomes increasingly unsustainable over time. Notably, the three officials raised objections regarding policy language rather than actual interest rate actions, which is quite rare in Fed history; the last similar instance dates back to September 2020. This debate will be handed over to Kevin Warsh, who is set to take over as chair in mid-May, to continue advancing. Powell’s term is nearing its end, and the Fed’s next policy meeting will take place about a month after his departure.