Rate Cut Expectations "Overdone"? Federal Reserve Officials Speak Up to Stabilize Expectations - Two Governors Say Rate Cuts Still Possible This Year

CNBC Finance APP has learned that amid the Middle East conflict causing sharp market volatility and significant adjustments in interest rate expectations, Federal Reserve officials have stepped in to stabilize expectations. Two Fed governors explicitly stated on Friday that they still expect a rate cut this year, suggesting that recent Wall Street bets on abandoning rate cuts or even expecting rate hikes may be overly aggressive.

Fed Governor Waller and Vice Chair Bowman, responsible for regulatory affairs, spoke separately on Friday. Previously, the market had almost entirely ruled out the possibility of a rate cut in 2026. Meanwhile, another governor, Mester, also supports a rate cut and voted against maintaining current rates at this week’s policy meeting, advocating for an immediate 25 basis point cut.

In just three weeks, market expectations have undergone a dramatic reversal. Previously, traders widely anticipated multiple rate cuts by the Fed, but with Middle East conflict pushing oil prices higher and inflation concerns intensifying, the market has begun to discuss the possibility of rate hikes.

However, from the official stance of the Federal Reserve, the policy path has not fundamentally changed. The updated dot plot released this week still shows that 19 policymakers expect one rate cut this year overall. The recent statements from Waller and Bowman also confirm this outlook.

Bowman, in an interview, said that considering the weakening labor market, she expects three rate cuts by the end of 2026. Waller is more cautious but also leaves room for rate cuts. He noted that if the employment market continues to weaken, he would support a rate cut again within the year.

The recent “hawkish” shift in market sentiment is partly driven by Fed Chair Powell’s comments. At this week’s press conference, Powell emphasized inflation risks stemming from the Iran conflict, while discussions about worsening employment conditions were relatively limited, and he repeatedly stressed the high uncertainty about the future path. This has led the market to interpret that policy could shift toward a tighter stance.

However, employment data is signaling a different picture. The U.S. employment figures for February showed a decrease of 92,000 jobs. If future data continues in this trend, it would indicate a significant weakening of the labor market. Some institutions expect the seasonal pattern of weak employment in spring and summer to reemerge, pushing up unemployment rates and ultimately forcing the Fed to consider rate cuts.

In contrast, achieving a rate hike path would require multiple conditions to be met simultaneously, including an unemployment rate below 4.5%, core inflation reaching over 3.2% annually, and stable policy conditions. This scenario is more likely in an environment of moderate and sustained oil price increases, but currently, its probability remains limited.