Federal Reserve's Dovish Camp Collectively Turns Hawkish, Walsch's Debut Leaves Him "Stuck Between a Rock and a Hard Place"

Original author: Long Yue

Original source: Wall Street CN

Trump chose him to cut interest rates, but shortly after he took office, his colleagues began discussing raising them.

The Wall Street Journal recently published an in-depth report by veteran reporter Nick Timiraos, timed just before new Fed Chairman Kevin Warsh chairs his first rate-setting meeting. Timiraos, who has long covered the Fed, is regarded by the market as the "Fed's mouthpiece."

Timiraos writes that Warsh entered the room at an extremely awkward moment. He publicly advocated for rate cuts last year, and it was precisely this stance that won Trump's favor. However, just after he officially took office, the direction of internal Fed discussions has quietly reversed—no longer "when to cut," but "whether to hike."

This reversal is not sudden. Since the start of this year, U.S. inflation has risen instead of falling, breaking above 3%; the job market has regained strength; supply bottlenecks from the AI construction boom and rising oil prices driven by the Iran conflict are all continuously adding fuel to rising prices. The reasons that originally supported expectations for rate cuts have disappeared one by one.

Warsh faces a committee he did not assemble, a set of forecasting tools he has long criticized, and a policy direction that goes against the wishes of the president who appointed him. This debut is destined to be anything but easy.

How Did the Dove Turn Hawkish?

Nothing illustrates this better than the shift in the stance of Fed Governor Christopher Waller.

For the entire last year, Waller worried about a weakening job market, even voting to cut rates this January against the majority of his colleagues. But just last month, he publicly stated that the latest data "pushed me in the other direction." He explicitly supported removing the "easing bias" from the statement and bluntly stated: "I can no longer rule out the possibility of a rate hike at some point in the future."

As for those in the market still discussing a September rate cut, Waller's response was quite direct: "As a serious central banker, you cannot seriously talk about this."

The Middle Ground Is Also Shifting

If Waller represents the dove faction's pivot, the change in Governor Lisa Cook shows that even the "middle ground" is loosening.

Cook is not a hawk. She stated last month that maintaining the current rate was the correct choice, with her baseline scenario still being that inflation would fall on its own. However, she added a condition—one that would have been almost impossible for her a year ago: she said she is "ready to raise rates" if the decline in inflation "does not materialize in a timely manner."

The underlying concern is that five consecutive years of above-target inflation may have begun to influence how businesses and workers set prices and negotiate wages, forming self-reinforcing expectations.

The Hawks Have Been Waiting for This Day

The hawks on the committee have actually long been dissatisfied.

When the Fed cut rates at the end of last year, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari dissented, arguing that the case for easing was inherently untenable.

In April this year, the three joined forces again. This time, their opposition was not to the rate decision itself, but to the wording in the statement that implied the "next move is more likely a cut"—they demanded its removal to signal that a rate hike was equally possible.

Now, the data is tilting further in their favor. Hammack stated this month that maintaining the status quo is reasonable, "but if recent trends continue, action may soon be necessary." Logan went further: "I am increasingly concerned that it may be necessary to raise rates later this year."

The hawks also raise a noteworthy point: As inflation rises, the inflation-adjusted "real interest rate" is actually falling. This suggests that the Fed's policy is less restrictive on the economy than the headline numbers imply. In other words, simply "holding steady" is, in a sense, already an easing measure.

Warsh's Dilemma

This Wednesday, the Fed is expected to keep the benchmark interest rate unchanged at 3.5% to 3.75%. But the real focus is on two things.

The first is the statement's wording. The "easing bias" phrase maintained for months—hinting that the next move is more likely a cut—is expected to be removed, signifying that the possibilities of a cut and a hike are now seen as equal.

The second is the quarterly "dot plot." In March, over a dozen officials still anticipated at least one rate cut this year. This time, most officials are expected to project maintaining the current rate throughout the year, with some even marking a rate hike on the chart.

Warsh himself has long criticized the Fed's over-reliance on "forward guidance," including tools like the dot plot. He could choose not to submit his own forecast or remove related hints from the official statement. However, Timiraos points out that this distinction in approach matters little to investors—they will read the substance directly. The one who truly cares about this distinction is the president hoping for lower rates.

Chicago Fed President Austan Goolsbee's comment last month might best encapsulate the current situation: "Now we face a fairly serious inflation problem developing, but the job market is basically stable."

The result is that almost no one on the committee is advocating for rate cuts anymore. Warsh's debut as chair may send a signal—the Fed's next move could be a rate hike. And all of this will be conveyed through the tools he has long criticized, by a committee he did not choose, moving towards a direction his appointing president does not want to see.