<\/p>\n
This isn\u2019t what he signed up for.<\/p>\n
But incoming Fed Chair Kevin Warsh can thank the nearly three-month Iran War for fueling the hot mess rising from the surprisingly deep hawkish shift among U.S. central bankers.<\/p>\n
The result: Their newly released signals that rising inflation rates could cause an interest-rate hike this year,<\/p>\n
This jarring tilt is much more intense than expected according to the minutes of the April 28-29 Federal Open Market Committee meeting released May 20:<\/p>\n
\u201cA majority of participants\u201d highlighted\u2026that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.As a result, \u201cmany participants indicated\u201d that they would have preferred removing the language from the postmeeting statement that suggested an easing bias regarding the likely direction of the committee’s future interest-rate decisions.\u00a0<\/p>\n
The discussion, which resulted in the most divisive FOMC vote in over three decades, reflected a tremendous swing from the beginning of the year.<\/p>\n
As recently as January the central bank was indicating there would be at least one and perhaps two cuts to the benchmark Federal Funds Rate in 2026.<\/p>\n
“Rate hikes are back on the table,” David Russell, global head of market strategy at TradeStation, told Reuters. “The committee is getting more hawkish as Kevin Warsh joins.”<\/p>\n
Fed holds rates steady in historic April vote<\/p>\n
The FOMC, in a decisive 8-4 vote on April 29, held the benchmark Federal Funds Rate at 3.50% to 3.75%.<\/p>\n
It was the first time in more than 30 years the FOMC vote reflected four dissents.<\/p>\n
It was the FOMC\u2019s third pause after cutting rates by 75 basis points during its last three meetings of 2025 to boost a weakening labor market.<\/p>\n
Outgoing Chair Jerome Powell, who will break with tradition and remain on the Board of Governors, said in a press conference after the April meeting that the U.S. economy was “resilient” and showing signs of moving toward neutral.\u00a0<\/p>\n
A neutral state is when an economy operates at sustainable growth with stable inflation and full employment without overheating or recessionary pressure.\u00a0<\/p>\n
It can also mean interest rates move in either direction.<\/p>\n
\u201cPeople are not saying that we need to hike now,\u201d Powell said.<\/p>\n
Inflation clearly top of mind for many Fed officials<\/p>\n
The April minutes, which don\u2019t identify participants by name, reflect the deepening concerns of nearly all 19 Fed officials of the higher energy costs not only at American gas pumps but those dripping into prices across multiple goods and services.<\/p>\n
Oil prices are up over 50% since the war began and showing little sign of retreating as long as the Strait of Hormutz remains blocked.<\/p>\n
\u201cThe vast majority of participants noted an increased risk that inflation would take longer to return to the committee\u2019s 2% objective than they had previously expected,\u201d the minutes said.<\/p>\n
In the weeks since the April meeting, several Fed officials have dropped strong warnings about the worsening inflation outlook, sending bond yields soaring.<\/p>\n
Meanwhile, the labor market, while still fragile, is stabilizing.<\/p>\n
FOMC April statement sparked cracks in rate-cut outlook<\/p>\n
Outgoing Fed Governor Stephen I. Miran voted against the \u201cwait-and-see\u201d approach, preferring to lower the target range for the funds rate by 25 basis points.<\/p>\n
Cleveland Fed President Beth M. Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan also dissented.<\/p>\n
But the April statement said the three regional bank heads \u201csupported maintaining the target range for the Federal Funds Rate but did not support inclusion of an easing bias in the statement at this time.\u201d\u00a0\u00a0\u00a0<\/p>\n
The newly-released minutes showed a more intense concern from Fed officials that inflation risk will be guiding future policy on a meeting-by-meeting basis.<\/p>\n
Fed watchers expect the additional support could be driven from voting FOMC members who didn\u2019t want to actually dissent and\/or the regional bank presidents who aren\u2019t voting this year.<\/p>\n
The April FOMC statement said that \u201cdevelopments in the Middle East are contributing to a high level of uncertainty about the economic outlook.\u201d\u00a0<\/p>\n
\u201cThe Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments,\u2019\u2019 the statement said.<\/p>\n
Economists, traders adjust Fed rate-cut outlooks<\/p>\n
The cumulative effects of the energy shock is testing the Fed\u2019s confidence that inflation, which economists are forecasting to hit as high as 5% this summer, will fall back to its 2% goal.<\/p>\n
Note: the annual inflation rate hasn\u2019t hit that goal in five years mainly due to the pandemic.\u00a0\u00a0<\/p>\n
A May 19 Reuters poll showed a hefty shift among economists away from previously solid expectations for rate cuts this year, with fewer than 50% now projecting a reduction by December, down from two-thirds just \u200ba month earlier.\u00a0<\/p>\n
Roughly half see no change in rates this year, and a handful of respondents penciled in at least one rate hike, the poll found.<\/p>\n
The widely watched CME Group FedWatch Tool, which is based on futures prices, is showing 39% odds of no additional rate cuts this year and a 60% probability of at least one 25-basis-point cut.\u00a0<\/p>\n
Fed\u2019s Paulson signals interest-rate outlook\u00a0<\/p>\n
Philadelphia Fed President and CEO Anna Paulson, who voted to hold rates steady at the April meeting, saidmonetary policy is currently in \u201ca good place now\u201d in a speech at the Federal Reserve Bank of Atlanta\u2019s 2026 Financial Markets Conference in Amelia Island, Florida on May 19.\u00a0<\/p>\n
\u201cAssuming the labor market remains in balance, rate cuts would only become appropriate once we have seen sustained progress on inflation,\u2019\u2019 Paulson said.<\/p>\n
But she also signaled that future economic data may signal the need to tighten this stance.<\/p>\n
\u201cHowever, I think it is healthy that market participants have taken on board scenarios where the funds rate remains unchanged for an extended period, as well as scenarios where further tightening becomes necessary,\u2019\u2019 she said.<\/p>\n
Related: Morgan Stanley resets Fed interest rate cut path for 2027<\/p>\n
Paulson noted that if the Iran War is resolved soon and \u201cshipping and oil production return to normal quickly, inflation and inflation risks are likely to subside relatively quickly.\u201d<\/p>\n
\u201cIf it takes more time to resolve, inflation and inflation risks, along with risks to the labor market, are likely to be elevated for longer,\u2019\u2019 she added.<\/p>\n
Morgan Stanley sees two Fed rate cuts in 2027<\/p>\n
Morgan Stanley is one of the few major Wall Street banks still forecasting interest-rate cuts.<\/p>\n
In a May 18 note emailed to TheStreet, Morgan Stanley calls for two 25-basis-point rate cuts in 2027, one in March and the other in June.<\/p>\n
\u201cThe bar for monetary easing has risen, and we expect the Fed to remain on hold through 2026 before beginning a gradual normalization cycle in 2027,\u2019\u2019 the note said.<\/p>\n
The note said that despite back-to-back hot inflation reports last week and multiple forecasts that the Iran War energy shock will continue to spike prices this summer, those increases will be temporary much like the fading impact of tariffs on prices.<\/p>\n
\u201cKey assumptions underpinning our core inflation outlook are that tariff passthrough will fade over the coming months and that oil spillovers into core (inflation) will remain limited,\u2019\u2019 the note said.<\/p>\n
Warsh, White House expected rate cuts this summer<\/p>\n
The next FOMC meeting is June 16-17, Warsh\u2019s first as chair.<\/p>\n
President Donald Trump, who will host Warsh\u2019s swearing-in ceremony at the White House May 22, has been extremely critical of Powell for not slashing interest rates to 1% or less over the last 16 months.<\/p>\n
Warsh is a former Fed governor whose tight Wall Street connections aided with the central bank\u2019s efforts to mitigate the 2008 financial crisis and the resulting Great Recession.\u00a0<\/p>\n
He has said he favors lower interest rates under a \u201cregime change\u201d instituting multiple reforms at the Fed, including fewer communications and a tightening of the Fed\u2019s $6.7 trillion balance sheet.<\/p>\n
Trump has backed away from expectations that Warsh would immediately lead his Fed colleagues into dramatically lowering rates while saying repeatedly that energy prices will quickly drop once the Iran War finally ends.\u00a0<\/p>\n
Top analyst drops bombshell interest-rate outlook<\/p>\n
Ed Yardeni, President & Chief Investment Strategist at Yardeni Research, said in a May 18 note that the Fed will issue a 25 basis-point hike in July.<\/p>\n
\u201cWe expect the Fed to hold rates unchanged at the June meeting and shift to a tightening policy stance,\u2019\u2019 the note said, adding that the macroeconomic backdrop no longer supports an easing bias, let alone a rate cut.\u201d<\/p>\n
But the note also said a more hawkish Fed under Warsh than investors expect \u201cwould actually work in Trump\u2019s favor via its downward effect on long-term Treasury yields.\u201d<\/p>\n
Related: Major bank drops bombshell on Fed interest-rate bets<\/p>\n
#Fed #officials #double #blunt #ratecut #message<\/p>\n","protected":false},"excerpt":{"rendered":"
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