The Fed’s mouthpiece: Harker’s first major decision—whether to reverse last year’s rate cuts with a “reverse operation”

Federal Reserve Chair Powell’s first meeting during his tenure kept interest rates unchanged, but internal consensus is starting to crack. Several members are worried that inflation is heating up, and at the next meeting on July 28–29, there may be discussions about raising rates.
(Background: Fed’s new chairman Powell’s debut shocked the market! Traders bet on a rate hike in September; there may be “two rate hikes” by year-end.)
(Additional background: The Fed’s semiannual report: the Middle East conflict and a surge in AI have pushed inflation up to 4.1%, with rates frozen at 3.5%–3.75%)

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• The test facing consensus
• This week’s congressional hearings: Powell’s first signal flare
• Powell’s communications overhaul is also underway

In an article published July 13, Fed “megaphone” Nick Timiraos said that Kevin Warsh hosted the first rate decision meeting after taking office as chair in Washington last month, and the entire committee unanimously agreed to keep the federal funds rate unchanged in the 4.00%–4.25% range. Reaching consensus then was not difficult, because there was virtually no intention among committee members to take action.

The test facing consensus

But Timiraos emphasized that over the next few weeks, maintaining this kind of consensus will become more difficult. Some of his colleagues’ worries about inflation are intensifying, and some officials may push for discussion of rate hikes at the Federal Reserve meeting next month, July 28–29.

Based on Timiraos’s interpretation of his prior posts, meeting records show that “a small number” of participants had already seen “cases” for a rate hike as early as June. This is not unfounded—back in the March meeting records, committee members adopted a dual-sided description of the future path of rates.

This week’s congressional hearings: Powell’s first signal flare

This week, Powell will attend the “Federal Reserve Semiannual Monetary Policy Report” hearing at the House Committee on Financial Services—his first congressional appearance since taking office. Timiraos captured an interesting exchange: when asked at the hearing whether the Fed should raise rates “as a posture to signal credibility,” New York Fed President John Williams replied, “The way to maintain credibility is not to pose; it’s to let the market see your reaction function.”

By then, Powell will have the latest June inflation data—also the last batch of key economic releases before the late-July meeting. The market currently prices in expectations via federal funds futures, projecting a rate hike of 39 basis points before year-end; the yield on two-year U.S. Treasuries has already reached a 17-month high of 4.24%.

Powell’s communications overhaul is also underway

In addition to rate decisions, last month Powell also set up a communications working group led jointly by three central bank communications experts: Peter Fisher, former manager of the New York Fed’s Open Market Desk; Arminio Fraga, former governor of the Central Bank of Brazil; and Mervyn King, former governor of the Bank of England. Timiraos said the three cover cross-continent, cross-era central bank communications experience, hinting that Powell is preparing to redefine how the Fed talks with the market.

For Taiwan, if the Fed truly turns to raising rates by the end of July, the most direct effects would be increased pressure on the TWD exchange rate, higher new Taiwan dollar deposit rates following the hikes, and tech-stock volatility driven by an upward shift in the U.S. equities yield curve. It’s worth noting that Taiwan’s exports account for more than 60% of GDP; a widening dollar interest-rate spread would directly squeeze the TWD’s buffering capacity.