New Federal Reserve News Agency: The Fed is expected to stand pat this week; key question: signaling shelving rate cuts or merely delaying them

Nick Timiraos, the renowned financial journalist known as the “new Federal Reserve newsman,” wrote ahead of the Federal Reserve’s April FOMC meeting:

Two years ago, when the U.S. economy was running smoothly and inflation was steadily falling, Federal Reserve Chairman Powell responded to concerns about “stagflation” with a joke: “Frankly, I see neither stag nor flation.”

Now, a real war-triggered energy shock has brought this risk back to the forefront—at a time when U.S. inflation has never truly returned to the Fed’s 2% target. The historical mirror image of 1970s stagflation is no longer as unattainable as it was two years ago.

Stagflation refers to the predicament where economic growth stagnates while high inflation persists. Last year, as tariff policy threats pushed up prices and suppressed employment, the topic resurfaced. But at that time, it remained theoretical, and policy adjustments could easily correct course.

Timiraos points out it is almost certain that Fed officials will keep the benchmark interest rate unchanged at the 3.5%-3.75% range at the two-day meeting ending this Wednesday. However, this meeting—Powell’s last before his term ends—marks a juncture for a deeper debate: How long can the committee stick to the stance that “the next move is more likely to be a cut rather than a hike”?

Fed officials are closely watching how the U.S. economy absorbs its fourth supply shock in five years: pandemic restart, Russia-Ukraine conflict, tariff turmoil, and the Iran war. Each shock can be interpreted as an isolated incident not warranting policy response. But the cumulative effect has officials walking on eggshells. Tariffs are testing the tolerance of businesses and consumers for price increases.

Timiraos says in the article, Fed policymakers are still racking their brains over one question: Has weak job growth overestimated the labor market’s vulnerability? If economic demand for new jobs is less due to stalled immigration, then reduced job creation may not truly signal recession.

Fed Governor Waller has recently shifted focus from advocating for rate cuts due to concerns about the labor market, to being alert to inflation. He cited the 1970s—when officials repeatedly treated shocks as “temporary” and did not respond, resulting in inflation expectations becoming unanchored. Waller said:

We must remain vigilant about this string of accidental shocks; expectations are critical. At a certain tipping point, you may have to respond.

We always say the target is 2%. Five years have gone by, and inflation never really returned to that level. When will people start questioning your commitment?

Although the Iran war has announced a ceasefire, the Strait of Hormuz remains effectively blocked. Aviation fuel prices have soared. Fed officials now expect the process of returning inflation to the 2% target to stall for yet another year.

Some Fed officials previously talked about resuming rate cuts this year to offset the “automatic tightening” effect when inflation falls but rates stay unchanged. That rhetoric is now history. New York Fed President Williams said earlier this month:

As things stand, that scenario simply doesn’t exist. If inflation is moving anywhere, it’s moving upward.

Williams characterizes the current Fed stance as a deliberate choice, not a passive response: Our monetary policy is clearly in the right place—that’s exactly where we want it to be.

Timiraos points out that compared to the 1970s, the U.S. economy has changed profoundly, and a complete repeat is unlikely. Moreover, today’s Fed is much more attentive to managing inflation expectations.

For FOMC members, Timiraos says, the bigger question is: should they revise the official statement’s wording to suggest rate cuts are basically off the table. History shows that such language changes can be as impactful as actual rate decisions.

Since late last year, the Fed statement has included a nine-word phrase implying the next policy move is more likely a cut than a hike. In the last two meetings, a minority of officials have advocated deleting this phrase—removal would mean both rate cuts and hikes are seen as equally possible:

Supporters for deletion argue: inflation is moving in the opposite direction; with shocks continuing to pile up, predicting a return to 2% grows harder; the labor market remains strong, stock prices have rebounded to historic highs. All this seems at odds with the image of a committee still hinting at imminent rate cuts.

However, the mainstream view within the committee is that such a change is too radical. Changing the wording would itself tighten financial conditions, a hawkish move officials may not be ready for. Powell ally Williams said, “It’s not suitable for us to issue strong forward guidance now, and we honestly haven’t done so.”

Fed officials will reconsider this issue again this week.

Timiraos says the FOMC’s thinking sometimes moves faster than its wording. Before deploying the “heavy hammer” of changing the statement, officials have other, more indirect ways to signal policy direction—whether at Powell’s press conference Wednesday, speeches in May, or economic forecasts at the mid-June meeting.

Timiraos concludes that by then, steering the FOMC may have switched to Kevin Warsh—Trump’s nominee and former Fed Governor, succeeding Powell. Deciding whether and how to formally adjust Fed guidance may fall to Warsh, whose judgment on this issue could be very different from his predecessor.

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