This debut hosted by Warsh may send a signal — the Federal Reserve's next step could be an interest rate hike.

Written by: Long Yue

Source: Wall Street Journal

Officials within the Federal Reserve who previously advocated for rate cuts, including Waller and others, have recently stated that they do not rule out an interest rate hike, and nearly no one in the committee is advocating for a rate cut. This debut hosted by Warsh may send a signal — the Federal Reserve's next step could be an interest rate hike.

Trump appointed him to lower rates, but shortly after he took office, his colleagues began discussing rate hikes.

The latest issue of the Wall Street Journal published an in-depth report written by seasoned journalist Nick Timiraos, with the timing right before the first interest rate meeting hosted by the new Federal Reserve Chairman Kevin Warsh. Timiraos has long been focused on Federal Reserve reporting and is seen as a "mouthpiece" for the Fed in the market.

Timiraos wrote that Warsh walked into this meeting room at a highly awkward moment. He publicly advocated for rate cuts last year, and it was precisely this position that gained him Trump's favor. However, just after he officially took office, the direction of discussions within the Federal Reserve quietly reversed — it was no longer about "when to cut," but rather "whether to raise."

This reversal did not happen suddenly. Since the beginning of this year, inflation in the United States has risen instead of falling, breaking through 3%; the job market has regained strength; supply bottlenecks from the AI construction boom and rising oil prices due to the war in Iran have continuously fueled prices. The reasons that initially supported expectations for rate cuts have disappeared one by one.

What Warsh faces is a committee that he did not personally assemble, a set of predictive tools he has long criticized, and a policy direction that is contrary to the intentions of the president who appointed him. This debut is bound to be challenging.

How did the doves turn into hawks?

The most indicative of the issue is the attitude shift of Federal Reserve governor Christopher Waller.

Waller spent the entire last year worrying about a weakening job market and even voted to support rate cuts in January despite opposition from many colleagues. But just last month, he openly stated that the latest data "pushed me in another direction." He clearly expressed support for removing the "easing bias" from the statement and bluntly said, "I can no longer rule out the possibility of raising rates sometime in the future."

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

The moderates are also wavering

If Waller represents the shift of the doves, then the change in governor Lisa Cook indicates that even the "middle ground" is shaking.

Cook is not a hawk; she declared last month that maintaining interest rates unchanged was the correct choice, with the baseline scenario still being that inflation would fall on its own. But she simultaneously added a condition — a condition that would have been nearly impossible for her a year ago: she said that if the fall in inflation "does not appear in a timely manner," she "is prepared to raise rates."

The concern behind this is that five years of inflation sustained above the target may have begun to affect how businesses and workers price and negotiate salaries, creating self-reinforcing expectations.

The hawks have long been waiting for this day

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

When the Federal Reserve cut rates at the end of last year, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari had expressed opposition to the rate cut decision, arguing that the reasons for easing were fundamentally unsound.

In April this year, the three joined forces again, not opposing the interest rate decision itself but the wording in the statement that suggested "the next step is more likely to be a rate cut" — they demanded its removal to indicate that rate hikes were also a possible option.

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

The hawks also raised a point worth noting: as inflation rises, the "real interest rates" adjusted for inflation are actually falling, which means that the Federal Reserve's policy constraints on the economy may be lower than the surface figures suggest. In other words, simply "holding steady" has, in a certain sense, already become a form of easing.

Warsh's dilemma

This Wednesday, the Federal Reserve is expected to maintain the benchmark interest rate at 3.5% to 3.75%. But the real highlights are in two places.

One is the wording of the statement. The "easing bias" that has been maintained for several months — suggesting that the next step is more likely to be a rate cut — is expected to be deleted, indicating that the possibilities of rate cuts and increases are now viewed as equal.

The second is the quarterly "dot plot." In March of this year, over a dozen officials expected at least one rate cut within the year. This time, most officials are expected to show no change for the year, and some may even mark rate hikes on the graph.

Warsh himself has long criticized the Federal Reserve's excessive reliance on "forward guidance," including tools like the dot plot. He could choose not to submit his own forecasts, or he could remove relevant hints from the official statement. However, Timiraos pointed out that this operational distinction is largely insignificant for investors — they will directly understand the substantive content. The one who truly cares about such distinctions is the president who hopes to see low interest rates.

Chicago Fed President Austan Goolsbee's remark last month perhaps best summarizes the current situation: "We are now facing a fairly serious inflation problem that is forming, but the job market is basically stable."

The result is that there is almost no one in the committee advocating for rate cuts anymore. This debut hosted by Warsh may send a signal — the Federal Reserve's next step could be an interest rate hike. And all of this will be conveyed through the tools he has long criticized and by a committee he did not personally select, heading in a direction that his appointer does not wish to see.