Federal Reserve Mouthpiece: Intense Internal Power Struggles, Can the Dovish Rate Cut Stance Be Maintained

By: Wu Yu, Jintou Data

The Federal Reserve’s two-day policy meeting will conclude in the early hours of Thursday Beijing time, and this will also be the last meeting led by Chair Powell before he steps down. The market generally expects the Fed to stand pat, but the question is whether policymakers will signal that the rate-cut plans have derailed—or merely been postponed?

In a piece, Nick Timiraos, a reporter for The Wall Street Journal known as the “voice of the Fed,” noted that right now, the energy shock triggered by the Iran war, combined with multiple supply disruptions, has once again heated up the risk of stagflation. The Fed is highly likely to keep its benchmark interest rate unchanged at 3.5% to 3.75%, while intense internal debate is underway over adjusting policy wording and the path for rate cuts.

Timiraos recalled that two years ago, when the U.S. economy was steadily growing and inflation was easing, Powell had responded to questions about stagflation in a humorous way. Without changing his expression, he said, “In fact, I’ve neither seen the ‘stagnation’ nor the ‘inflation.’”

At that time, stagflation was only a risk at the theoretical level, and there was still room to reverse course with policy adjustments. But now, the energy shock caused by the Iran war has brought that risk back to the fore—U.S. inflation has never returned to the Fed’s 2% target in five years, and the specter of stagflation from the 1970s is no longer far away.

Currently, the U.S. is experiencing its fourth supply shock within five years, including: the pandemic economic restart, the Russia-Ukraine conflict, the “tariff war,” and the Middle East war at present.

Timiraos said that although each of the above shocks could be viewed as a “one-off event,” requiring no excessive policy response, their cumulative impact has left Fed officials highly vigilant. In particular, the Trump administration’s tariff policy has long been testing businesses’ and consumers’ willingness to endure high prices.

Fed internal rate-cut expectations weaken

Timiraos pointed out that Fed officials are grappling with whether weak employment growth is exaggerating the fragility of the labor market—if reduced economic job absorption results from slower immigration, the level of employment growth today may already be sufficient.

Waller, a Fed governor who had supported three rate cuts last year due to concerns about the labor market, has this month shifted to warning about inflation risks. Looking back on the 1970s, he cautioned: “We must be wary of this series of one-off shocks. Expectations matter, and at some point we may have to respond.”

Although the Iran war has achieved a ceasefire, the Strait of Hormuz remains effectively under substantial blockade, and jet fuel prices have surged. Fed officials expect that it will still take at least a year for inflation to return to the 2% target. Waller said bluntly: “We’ve been saying we want to control inflation at 2%, and five years have passed, but we’ve never achieved it. When will people start doubting our commitment?”

Earlier, some officials had discussed restarting rate cuts this year to offset the automatic tightening effect caused by “inflation falling while rates remain unchanged,” but that idea has now been shelved. On April 16, New York Fed President Williams told reporters, “We are not in a situation like that right now. On the contrary, inflation is rising.”

However, Timiraos also said that compared with the 1970s, the U.S. economy has changed, making a complete replay of stagflation much less likely. The Fed’s current focus on inflation expectations is also far higher than it was then. As Williams defined the Fed’s current policy stance as “a well-considered choice rather than a passive response,” he said clearly: “Our monetary policy is in the right place—that’s exactly the state we want.”

Will the Fed policy statement change?

Timiraos said that right now, the bigger issue facing the Fed’s committee is whether to modify the official statement to imply that rate cuts are no longer under consideration—historically, changes in policy wording have been at least as important as the decisions on interest rates.

Since the end of last year, the statement has consistently retained the wording that the “next policy action is more likely to be a rate cut than a rate hike.” In the past two meetings, a small number of officials hoped to remove that language, and doing so would mean rate cuts and rate hikes are equally possible.

These officials believe inflation is heading in the wrong direction; with shocks continuing to accumulate, it is becoming increasingly difficult to bring inflation back to 2%. Meanwhile, with the labor market staying resilient and the stock market rebounding to historical highs, these outcomes do not align with some officials’ reasons for supporting rate cuts.

However, Timiraos also pointed out that the committee’s mainstream view is that such an adjustment would be too aggressive—formally revising the wording would tighten financial conditions, and this kind of hawkish move is one that officials are not yet prepared to take. As Williams, Powell’s key ally, said: “We don’t need to provide strong forward-looking guidance, and we indeed are not doing that right now.”

Timiraos said officials will discuss this issue again this week. Notably, the committee’s thinking sometimes moves faster than its wording adjustments. Before officially changing the policy statement, officials will convey the policy direction through more subtle means—for example, Powell’s press conference, speeches by officials in May, or the forecasts released at the next meeting in mid-June.

However, by then the committee will likely be led by Waller, the former Fed governor nominated by Trump to replace Powell. The decision on whether, and how, to formally adjust the Fed’s policy guidance may fall to Waller, whose views on this issue may be somewhat different.