The dovish faction within the Federal Reserve collectively turns hawkish; Waller's debut faces a "dilemma."

```

Trump chose him to cut interest rates, but not long after he took office, his colleagues began discussing rate hikes.

The Wall Street Journal recently published a deep-dive report by veteran journalist Nick Timiraos, just ahead of the first rate-setting meeting chaired by the new Federal Reserve Chairman, Kevin Warsh. Timiraos has covered the Fed extensively and is considered the "Fed mouthpiece" by the market.

Timiraos writes that Warsh walked into the meeting room at an extremely awkward moment. Last year, he openly advocated for rate cuts, which is how he gained Trump's favor. However, once he officially took office, the discussion inside the Fed quietly reversed course—from "when to cut" to "whether to hike."

This reversal wasn't sudden. Since the start of this year, U.S. inflation has risen rather than fallen, now surpassing 3%; the job market has rebounded; supply bottlenecks caused by the AI boom, and oil prices driven up by the Iran war, are all adding fuel to the fire of rising prices. The reasons supporting rate cut expectations have disappeared one after another.

Warsh faces a committee he did not assemble himself, a set of forecasting tools he has long criticized, and a policy direction that contradicts the will of the president who appointed him. This debut is destined to be difficult.

How did the doves turn hawk?

The clearest explanation comes from Fed Governor Christopher Waller's change in attitude.

Waller spent all last year worrying about a weakening job market, and even voted for a rate cut in January this year against most of his colleagues. Yet just last month, he publicly stated that the latest data "pushed me in another direction." He explicitly supported removing the "easing bias" from the statement and said, "I can't rule out the possibility of a rate hike at some point in the future."

Regarding ongoing discussions in the market about a September rate cut, Waller's response was quite direct: "As a serious central bank official, you can't talk about this seriously."

Centrists are wavering too

If Waller represents the dovish shift, then Governor Lisa Cook's changes indicate that even the "middle ground" is unraveling.

Cook is not a hawk; last month she still said keeping rates unchanged was the right choice, and that the baseline scenario was still for inflation to subside on its own. But she added a condition—a condition that would have been almost impossible for her a year ago: She said if inflation "does not fall in a timely manner," she is "ready to hike rates."

The underlying worry is that five years of continued above-target inflation may be starting to affect how companies and workers price products and negotiate wages, forming self-reinforcing expectations.

The hawks have been waiting for this day

The hawks in the committee have actually been dissatisfied for a long time.

At the end of last year, when the Fed cut rates, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari all opposed the decision, believing the rationale for easing was flimsy.

In April, the three teamed up again, this time not opposing the rate decision itself, but objecting to the statement's wording that implied "the next move is more likely to be a rate cut"—they demanded its removal to signal that a rate hike was equally possible.

Now, the data is further leaning their way. Hammack stated this month that keeping rates unchanged is reasonable, "but if recent trends continue, action may soon be needed." Logan went further: "I'm increasingly concerned that later this year, a rate hike may be necessary."

The hawks also put forward an argument worth noting: As inflation rises, inflation-adjusted "real rates" are actually falling, meaning the Fed’s policy may be less restrictive on the economy than the headline numbers suggest. In other words, just "standing pat" is, in a sense, already a form of easing.

Warsh's dilemma

This Wednesday, the Fed is expected to hold the benchmark rate at 3.5% to 3.75%. The real focus is on two things.

First is the language of the statement. The months-old "easing bias"—implying the next move is more likely to be a rate cut—is expected to be removed, signaling both rate cuts and hikes are seen as equally possible.

Second is the quarterly "dot plot." In March, more than ten officials still expected at least one rate cut this year. This time, most officials are expected to show no change for the year, and some may even mark rate hikes on the plot.

Warsh himself has long criticized the Fed for over-relying on "forward guidance," including tools like the dot plot. He can choose not to submit his own forecast, or remove relevant hints from the official statement. But Timiraos points out that such operational differences don’t mean much to investors—they will read the substance directly. The person who cares about these distinctions is the president who hopes to see low interest rates.

Chicago Fed President Austan Goolsbee’s words last month may best summarize the current situation: "Now we are facing the buildup of a fairly serious inflation problem, but the job market is basically stable."

The result is: almost no one in the committee is still advocating for rate cuts. Warsh’s first meeting may send a signal—the Fed’s next move could be a rate hike. And all this will be communicated through the very tools he has long criticized, by a committee he didn’t choose, heading in a direction his appointer does not want to see.

Risk Disclaimer and TermsThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not consider any individual user's specific investment objectives, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions herein are suitable for their particular circumstances. Investing accordingly is at your own risk. ```