Written by: Wu Yu, Jin Ten Data

The Federal Reserve's two-day meeting will conclude at midnight on Thursday Beijing time, marking the last meeting led by Powell before he steps down as chairman. The market generally expects the Fed to maintain its position, the question is whether policymakers will suggest that the plan for interest rate cuts has derailed or just been delayed?

Nick Timiraos, a journalist for The Wall Street Journal, known as the "mouthpiece of the Fed," pointed out that currently, the energy shocks triggered by the Iranian war combined with multiple supply disturbances have led to a renewed risk of stagflation. The Fed is likely to keep the benchmark interest rate unchanged at 3.5% to 3.75%, with intense internal debates over adjustments to policy wording and the path for rate cuts.

Timiraos recalled that two years ago, when the U.S. economy was growing steadily and inflation was retreating, Powell humorously responded to stagflation concerns, stating flatly: "In fact, I see neither 'stag' nor 'flation'."

At that time, stagflation was merely a theoretical risk, and policy adjustments still had room to maneuver. But now, the energy shock from the Iranian war has brought this risk back to the forefront—the U.S. inflation has not returned to the Fed's 2% target for the past five years, and the shadows of 1970s stagflation are no longer distant.

Currently, the U.S. is experiencing its fourth supply shock in five years, including: the reopening of the economy post-pandemic, the Russia-Ukraine conflict, the "tariff war," and the ongoing war in the Middle East.

Timiraos noted that although each of the above shocks can be seen as "one-off events" that do not require an excessive policy response, the cumulative effect has made Fed officials highly alert. Especially Trump's tariff policies have begun to test businesses' and consumers' willingness to bear high prices.

Expectations for rate cuts within the Fed have weakened

Timiraos pointed out that Fed officials are struggling with whether weak job growth has exaggerated the fragility of the labor market—if economic employment absorption capacity declines due to slowed immigration, the current level of job growth may be sufficient.

Waller, a Fed governor who previously supported three rate cuts last year due to concerns about the labor market, has shifted this month to a heightened alert about inflation risks. Reflecting on the history of the 1970s, he warned: "We must be cautious about this series of one-off shocks; expectations are important, and at some point we may have to respond."

Although the Iranian war has reached a ceasefire, the Strait of Hormuz remains effectively blockaded, and aviation fuel prices have surged. Fed officials expect that it will take at least a year for inflation to return to the 2% target. Waller bluntly stated, "We have always said we want to keep inflation at 2%, yet five years have passed, and we have never achieved it. When will people start to question our commitment?"

Previously, some officials had discussed restarting rate cuts this year to counter the automatic tightening effect of "declining inflation and unchanged rates," but this idea has now been shelved. New York Fed President Williams stated to reporters on April 16, "Currently, we are not in such a situation; on the contrary, inflation is rising."

However, Timiraos also stated that the U.S. economy has changed compared to the 1970s, and the likelihood of a complete repeat of stagflation is low, and the Fed's current focus on inflation expectations far exceeds that of the past. Just as Williams defined the Fed's current policy stance as "a considered choice, rather than a passive response," he clearly stated, "Our monetary policy is in the right place, and this is the state we want."

Will there be changes to the Fed's policy statement?

Timiraos stated that currently, the bigger issue facing the Fed committee is whether they should modify the formal statement to imply that rate cuts are no longer on the table—historically, changes in policy wording have been at least as important as rate decisions.

Since the end of last year, the statement has retained the wording that "the next policy action is more likely to be a rate cut rather than a rate hike," and in the last two meetings, a few officials have wanted to remove this wording, signaling an equal possibility for both rate cuts and hikes.

These officials believe that inflation is moving in the wrong direction, shocks are accumulating, and the difficulty of returning to 2% inflation is increasing; meanwhile, the labor market remains strong, and the stock market has rebounded to historical highs, which contradicts the reasons some officials support rate cuts.

However, Timiraos also pointed out that the mainstream view of the committee believes that such an adjustment is too radical—changing the wording formally would itself tighten financial conditions, which is a hawkish move that officials are not yet prepared for. As a key ally of Powell, Williams stated, "We do not need to provide a strong forward guidance, and we are indeed not doing so at the moment."

Timiraos noted that officials will discuss this issue again later this week. Notably, the committee's thoughts sometimes move faster than their wording adjustments, and before formally modifying the policy statement, officials may convey the policy direction through more subtle means—such as 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 is likely to be led by Waller, a former Fed governor nominated by Trump to succeed Powell, and the decision on whether and how to formally adjust the Fed's policy guidance may fall to Waller, with his views on this issue potentially differing.