Federal Reserve Mouthpiece: Internal Struggles Intensify, Can the Bias Toward Rate Cuts Be Maintained? _金色财经

Author: Wu Yu, Jinshi Data

The Federal Reserve's two-day policy meeting will conclude in the early hours of Thursday Beijing time. This is also the last meeting chaired by Powell before he steps down as chair. The market generally expects the Fed to maintain the status quo, but the question is whether policymakers will signal that rate cut plans have been derailed or merely delayed?

Nick Timiraos, a reporter for The Wall Street Journal and known as the "Fed whisperer," wrote that currently, the energy shock triggered by the Iran war, combined with multiple supply disruptions, has reignited stagflation risks. The Fed is highly likely to keep its benchmark interest rate unchanged at 3.5% to 3.75%, while internally engaging in intense debate over adjustments to policy language and the path of rate cuts.

Timiraos recalled that two years ago, when the U.S. economy was growing steadily and inflation was falling, Powell responded humorously to questions about stagflation, saying with a straight face: "Frankly, I see neither 'stag' nor 'flation.'"

At that time, stagflation was merely a theoretical risk, and policy adjustments still had room for reversal. But now, the energy shock from the Iran war has brought this risk back to the forefront—U.S. inflation has failed to return to the Fed's 2% target for five years, and the shadow of 1970s stagflation is no longer distant.

Currently, the U.S. is experiencing its fourth supply shock in five years, including: the post-pandemic economic reopening, the Russia-Ukraine conflict, the "tariff war," and the ongoing Middle East war.

Timiraos stated that although each of these shocks could be seen as a "one-off event" requiring no excessive policy response, the cumulative effect has put Fed officials on high alert. In particular, the Trump administration's tariff policies have already begun testing the willingness of businesses and consumers to accept higher prices.

Weakening expectations for rate cuts within the Fed

Timiraos pointed out that Fed officials are grappling with whether weak job growth exaggerates the fragility of the labor market—if slower immigration has reduced the economy's capacity to absorb employment, the current level of job growth might be sufficient.

Fed Governor Waller, who supported three rate cuts last year due to labor market concerns, has shifted this month to being wary of inflation risks. Reflecting on the history of the 1970s, he warned: "We must be vigilant about this series of one-off shocks. Expectations matter, and at some point, we may have to respond."

Although a ceasefire has been reached in the Iran war, the Strait of Hormuz remains effectively blockaded, and jet fuel prices have surged. Fed officials estimate it will take at least another year for inflation to return to the 2% target. Waller bluntly stated: "We've always said we want to control inflation at 2%. Five years have passed, and we've never achieved it. At what point will people start doubting our commitment?"

Previously, some officials had discussed restarting rate cuts this year to offset the automatic tightening effect of falling inflation while rates remain unchanged, but this idea has now been shelved. New York Fed President Williams told reporters on April 16: "Currently, we are not in that situation. On the contrary, inflation is rising."

However, Timiraos also noted that the U.S. economy has changed compared to the 1970s, making a full repeat of stagflation less likely, and the Fed's focus on inflation expectations is far greater than it was back then. As Williams defined the Fed's current policy stance as "a deliberate choice, not a passive response," he explicitly stated: "Our monetary policy is in the right place. This is exactly where we want it to be."

Will the Fed's policy statement change?

Timiraos said that currently, the bigger question facing the Fed committee is whether to modify the formal statement to suggest that rate cuts are no longer under consideration—historically, changes in policy language have been at least as important as rate decisions themselves.

Since the end of last year, the statement has retained the phrase that "the next policy action is more likely to be a rate cut than a hike." In the past two meetings, a minority of officials wanted to remove this wording, which would imply that the likelihood of rate cuts and hikes is equal.

These officials argue that inflation is moving in the wrong direction, shocks are accumulating, and returning inflation to 2% is becoming increasingly difficult. Meanwhile, a robust labor market and a stock market rally to record highs are inconsistent with the reasons some officials support rate cuts.

However, Timiraos also pointed out that the mainstream view within the committee is that such an adjustment would be too aggressive—formally modifying the wording would itself tighten financial conditions, a hawkish move that officials are not yet prepared for. Williams, a key ally of Powell, stated: "There's no need for us to give strong forward guidance, and we are indeed not doing so right now."

Timiraos said officials will discuss this issue again this week. Notably, the committee's thinking sometimes shifts faster than its wording. Before formally revising the policy statement, officials will communicate the policy direction through more subtle means—such as Powell's press conference, speeches by officials in May, or the forecasts released at the next meeting in mid-June.

By then, however, the committee is likely to be led by former Fed Governor Warsh, whom Trump has nominated to replace Powell. The decision on whether and how to formally adjust the Fed's policy guidance may fall to Warsh, and his view on this issue may differ.