- The Fed is expected to hold at 3.5%–3.75% Wednesday, but the “easing bias” language — implying the next move is more likely a cut — is expected to be removed, acknowledging a hike is now equally possible.
- The dot plot, which in March showed a dozen officials projecting at least one cut this year, is expected to shift to a majority favoring an extended hold; Warsh may decline to submit his own projection, consistent with his opposition to forward guidance.
- The doves have turned: Gov. Christopher Waller, who voted to cut in January, now says he “can no longer rule out rate hikes”; Gov. Lisa Cook says she is “prepared to raise rates” if disinflation does not materialize in timely fashion.
- The inflation shift was driven by unexpected forces: the AI build-out strained chip, electricity, and data-center supply in a way that “smacks of a boom”; Iran war energy costs added pressure; and the wealth effect from rising stocks and home prices is keeping consumers spending.
What Happened?
Kevin Warsh walks into his first Federal Reserve meeting as chairman on Wednesday facing a committee that has pivoted sharply since his nomination. Trump chose Warsh to deliver rate cuts; the FOMC is now debating hikes. The Fed is expected to hold rates in the 3.5%–3.75% range, but two signals are expected to shift: the statement’s easing bias will likely be removed, and the dot plot is set to show most officials favoring an extended hold. Hawks Cleveland’s Beth Hammack, Dallas’s Lorie Logan, and Minneapolis’s Neel Kashkari — who dissented in April demanding the bias be removed — are now openly discussing increases. Hammack said “if recent trends continue, it may soon be appropriate to act.” Logan said she is “increasingly concerned that higher interest rates could be necessary later this year.” Dovish officials have followed: Waller, who voted to cut in January, says he can no longer rule out hikes. Lisa Cook says she is “prepared to raise rates” if inflation doesn’t cool.
Why It Matters?
The inflation turn caught the Fed off-guard for reasons it hadn’t anticipated. The AI build-out, expected to tame inflation by lifting productivity, instead became a demand shock — straining chips, electricity, and construction materials. The Iran war added commodity and gasoline price pressure. And the wealth effect from a four-year equity bull market is sustaining consumer spending by higher-income households. As headline inflation has climbed, the real (inflation-adjusted) interest rate has fallen — meaning the Fed has been inadvertently easing by holding steady. Chicago Fed President Austan Goolsbee summarized the shift: “Right now we have a pretty significant inflation problem developing, but the job market has been mostly stable.” For Warsh, it is a politically awkward debut: Trump appointed him to deliver cuts, but he may instead preside over the Fed’s first rate hike in years.
What’s Next?
Wednesday’s statement and press conference are the immediate catalysts. Warsh could use his communications philosophy — he opposes tools like the dot plot — to soften the hawkish signal, framing changes as housekeeping rather than a pivot. But markets will read the substance either way. The Hormuz deal may ease energy inflation gradually, giving the committee some breathing room. But if the AI capex cycle and sticky shelter costs keep upward pressure on prices through summer, Hammack’s and Logan’s warnings suggest the first rate hike of the Warsh era could come before year-end.
Source: The Wall Street Journal
