Dovish Federal Reserve officials turn against each other; has the rate-cut cycle already ended?

（Source: Dingyu Information）

Despite the latest dot plot showing that Federal Reserve policymakers still expect to cut rates later this year, a closer look reveals that another signal is emerging. Against a backdrop in which tariffs and higher oil prices are pushing inflation up, and the labor market is weakening but not breaking down, some officials have hinted that their next move could be either a rate hike or a rate cut.

This is a subtle but consequential shift. Just a few weeks ago, the path for interest rates was clearly pointing downward. But over the past week, multiple officials have issued hawkish signals. Cook, a member of the board who has consistently aligned with the Fed’s majority position, said that higher energy prices resulting from the Iran war have further intensified inflation pressures, and that persistent inflation has once again become the Fed’s top risk.

Chicago Fed President Goolsbee was among the first officials to explicitly mention the possibility of a rate hike. “If inflation trends moderately, we could still be on a path to multiple rate cuts this year,” he told CNBC, “but I can also imagine a scenario where we need to raise rates.”

A rate hike is still a low-probability event for now, but even raising the possibility is worth watching. Fed Chair Powell said this month that at the last two meetings, officials did not choose to include an option in their public language of “potentially raising rates next.”

Even if rates do not rise, the odds that the six-round rate-cut cycle that began in September 2024 has already ended are also increasing.

The shift in market expectations for the Fed is one reason why long-term interest rates have risen sharply since the outbreak of the Iran war. Traders have raised expectations for future rates and even priced in the possibility of modest rate hikes this year. As these expectations show up in bond yields, businesses and households have immediately felt the impact—for example, higher mortgage rates.

Officials sometimes push back against market pricing that does not align with their own policy expectations. But Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said the Fed currently has no reason to contradict the outlook because the Iran war is intensifying inflation anxiety. He believes that the market’s new expectations that future rates will hold steady or move higher are beneficial for the Fed.

What matters is that many of the recent hawkish comments are coming from officials who were previously viewed as neutral or dovish. Waller, who has long been a strong supporter of rate cuts, said this month that inflation risks stemming from the Iran war have led him to support holding rates steady in March.

The Fed publishes a dot plot once per quarter, showing 19 policymakers’ expectations for the year-end rate level. Markets typically read strong signals from it, and the median expectation in the March dot plot points to one more rate cut during the year.

But Daly, the dovish San Francisco Fed president, said this guidance could be misleading. In a post on LinkedIn, she wrote that it “may convey a false sense of certainty… making it harder for the public to clearly anticipate how the Federal Open Market Committee (FOMC) will respond.” She added that there is no single most likely path for interest rates.

Powell himself also played down the importance of the dot plot. At this month’s press conference, he said, “We should be more cautious than usual when it comes to making forecasts.”

Of course, the case for rate cuts still exists. February saw U.S. employment fall by more than 90,000 jobs, and the unemployment rate rose to 4.4%. Many economists believe that if tensions in the Middle East ease, oil prices will fall back from current levels and inflation will continue to move down over time toward the Fed’s 2% target.

If oil prices rise sharply, it could deal a blow to consumer spending and employment, forcing the Fed to cut rates to avoid a recession.

Christopher Hodge, the chief U.S. economist at Natixis, said the Fed may still cut rates further during the year. He said, “At the start of this year, the economy simply didn’t have very strong momentum.”

But multiple factors together have raised the bar for the Fed to cut rates further.

Since September 2024, the target range for the federal funds rate has been lowered by nearly 2 percentage points to 3.5%–3.75%. Further rate cuts would bring it closer to a neutral level that neither suppresses nor stimulates inflation.

Economists can only speculate about the exact position of the neutral rate, but an increasing number of Fed officials say rates may already have reached that level. Fed Vice Chair Jefferson said last Thursday that recent rate cuts have “put rates roughly in the neutral range.” Richmond Fed President Barkin said last Friday that after the cuts, “the federal funds rate is at the upper end of the neutral range.” If rates are indeed at the neutral level, additional cuts would essentially mean stoking inflation further.

Officials also recognize that, as of this month, inflation has exceeded the Fed’s 2% target for six straight years, and they worry that the public could form long-term expectations of high inflation. Such expectations can become self-fulfilling. Under these circumstances, simply waiting for tariff shocks or a surge in oil prices to fade is not enough to bring inflation back to 2%. Measured by the Fed’s preferred gauge, current inflation is about 3%.

The Iran war has pushed up high-frequency consumer prices such as gasoline and food, further worsening this risk. Derek Tang, an analyst at monetary policy research firm, said Fed officials “really don’t want to see inflation expectations rise,” adding that “the problem is that they don’t know how close they are to the point of losing control.”

However, the Fed may still find some slight comfort: there is currently no evidence that inflation expectations have moved significantly higher. Last Friday, a March consumer survey from the University of Michigan showed that although short-term inflation expectations rose somewhat, long-term expectations remained moderate.

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责任编辑：郭建