Federal Reserve “megaphone”: The interest rate path has entered a key turning point, as the Fed has partially shifted from signaling rate cuts to a neutral, wait-and-see approach

ME News Message, May 2 (UTC+8). Nick Timiraos—known as the “Fed’s mouthpiece”—wrote that the Federal Reserve’s internal debate over the interest-rate path has reached a key turning point. Officials are no longer arguing about when to resume rate cuts; instead, they have begun to discuss the conditions under which additional rate hikes may be needed. In the statement after Wednesday’s policy meeting, Dallas Fed President Logan, Cleveland Fed President Harker, and Minneapolis Fed President Kashkari formally raised objections, opposing wording that implied “the next step is more likely to be a rate cut.”

The outgoing Chair Powell acknowledged that the committee had held “intense discussions.” Although the relevant guidance has not yet been deleted for procedural reasons, he clearly stated that the committee’s stance is shifting from accommodative to neutral, and he admitted that the arguments put forward by the dissenters “are completely solid.” This statement suggests that the Fed has moved beyond the stage of signaling rate cuts and has started to enter a more neutral wait-and-see phase.

The core factor driving this shift is the continuing energy shock brought about by the substantial closure of the Strait of Hormuz. Unlike past one-off price fluctuations that could fade on their own, this supply-chain disruption could keep energy costs elevated for months, sufficient to seep into broader prices and push up inflation expectations. In remarks on Friday, Kashkari further outlined the rate-hike scenario: if the strait cannot quickly restore navigation, then even if it requires further weakening the labor market, a series of rate hikes may still be necessary. Former senior Fed economist William English noted that when the current federal funds rate stands pat as inflation rises, it is effectively “passive easing,” and the longer it lasts, the harder it becomes to sustain.

Notably, the three officials objected to policy wording rather than actual interest-rate actions—an extremely rare occurrence in the Fed’s history. The last time a similar situation happened was September 2020. The continuation of this debate will be handled by the incoming Chair, Kevin Wusch, who is scheduled to take over in mid-May. Powell’s term is nearing its end, and the Fed’s next policy meeting will be held about a month after his departure.

(Source: BlockBeats)