Doves lead the "hawkish turn," with Federal Reserve officials hinting that "rate cuts may have already ended," but "the probability of rate hikes is low."

Wall Street Insight

Goolsbee of the Chicago Fed, once known as a dovish voice, has become one of the first officials to explicitly mention the possibility of rate hikes. Daly of the San Francisco Fed, who is known for being dovish, emphasized that there is not a single most likely path for interest rates. Fed Vice Chair Jefferson and Richmond Fed President Barkin, among others, believe that current interest rates are already close to the neutral level. Analysts noted that the very act of publicly mentioning the possibility of rate hikes already signals an important shift in the Fed’s policy balance.

A subtle but far-reaching shift is underway within the Fed. Against the backdrop of the Iran war pushing up oil prices and reigniting inflationary pressure, multiple officials who were previously seen as dovish—including Goolsbee and Daly—have sent hawkish signals in succession, suggesting that the Fed’s rate-cut cycle that began in September 2024 may have already reached its end.

The latest developments show that Chicago Fed President Goolsbee (Austan Goolsbee) has become one of the first officials to explicitly mention the possibility of rate hikes. He said that if inflation performs well, this year could still return to a track of multiple rate cuts, but he also acknowledged that “there are situations where rate hikes are needed.” Daly of the San Francisco Fed, who is known as a dovish voice, emphasized that there is not a single most likely path for interest rates.

Meanwhile, another key logic supporting the hawkish stance is that an increasing number of officials believe current interest rates are approaching or have reached the neutral level. Fed Vice Chair Philip Jefferson said that recent rate cuts have “put interest rates roughly in the neutral range.”

This shift in stance is directly hitting the market. Since the outbreak of the Iran war, long-end rates have risen sharply, prompting traders to raise their expectations for future rates and to modestly price in the possibility of rate hikes this year. This change in expectations has rapidly transmitted through bond yields to the real economy, forcing companies and households to bear higher financing costs such as mortgage rates.

Analysts noted that while a rate hike remains a low-probability event, the fact that its possibility is being publicly mentioned in itself marks a major shift in the Fed’s policy balance.

A collective shift by dovish officials, with policy signals clearly tightening

The notable aspect of this round of stance change is that the hawkish voices are mainly coming from officials previously viewed as neutral to dovish.

Fed Governor Christopher Waller was previously one of the most steadfast supporters of rate cuts, but this month he said that inflation risks stemming from the Iran war led him to support standing pat at the March meeting.

Fed Governor Lisa Cook also pointed out that the Iran war caused energy prices to rise, and that persistent high inflation has again become the top risk facing the Fed.

Recently, Mary Daly (Mary Daly), president of the San Francisco Fed, known for being dovish, wrote in an article that the interest-rate path conveyed by the Fed’s March dot plot “carries the risk of transmitting false certainty,” and emphasized that there is not a single most likely path for interest rates.

Fed Chair Powell himself also played down the reference value of the dot plot at this month’s press conference, saying, “More than ever, we should take a reserved approach to forecasts.”

The median prediction in the Fed’s March dot plot shows that there will still be one rate cut this year. But the statements from the officials above indicate that the credibility of this forecast is declining, and the market’s interpretation of it is becoming increasingly cautious.

Another important logic supporting the hawkish stance is that an increasing number of officials believe current interest rates are approaching or have reached the neutral level.

Since September 2024, the Fed’s target rate has been cumulatively lowered by nearly 2 percentage points, and currently sits in the 3.5% to 3.75% range.

Fed Vice Chair Philip Jefferson said earlier that recent rate cuts have “placed interest rates roughly in the neutral range.” Thomas Barkin, president of the Richmond Fed, said last Friday (March 27) that rate cuts have put the “federal funds rate at the higher end of the neutral range.”

If rates really are at the neutral level, further rate cuts would imply substantial easing stimulus. Against the backdrop that inflation has not yet fallen back to the 2% target, this would face the risk of fueling inflation. Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said:

Because the Iran war has intensified the Fed’s inflation worries, the Fed currently has little reason to correct the market’s hawkish pricing. The market’s new expectations that rates will remain stable or even move higher are, in effect, aligning with the Fed’s policy intentions.

Inflation has stayed above target for six years; pressure to manage expectations is rising

The stubbornness of inflation is the deeper reason behind the Fed’s tightening stance. Measured by the Fed’s preferred core metric, current inflation is about 3%, and has exceeded the 2% policy target for six consecutive years.

Officials are concerned that if the public forms long-term high-inflation expectations, those expectations themselves will have a self-fulfilling effect. At that point, simply waiting for tariff shocks or oil prices to fall will not be enough to bring inflation back to target.

Derek Tang, an analyst at Monetary Policy Analytics, said that Fed officials “very much do not want to see inflation expectations rise,” but the problem is that “they do not know how close they are to the threshold.”

The Iran war further heightens this risk. Increases in oil prices and food prices directly affect consumers’ day-to-day experience, making it more likely to push up short-term inflation expectations.

However, there is currently no evidence that expectations have risen systematically. A March consumer survey from the University of Michigan shows that while short-term inflation expectations have risen somewhat, long-term inflation expectations remain moderate.

However, even though hawkish signals are increasing, some economists still believe rate cuts this year are not out of the question. Weakness in the labor market provides some basis for rate cuts: February saw a decline of more than 90,000 in nonfarm payrolls, and the unemployment rate rose to 4.4%.

Christopher Hodge, chief U.S. economist at Natixis, said, “At the start of this year, the economy already lacked strong momentum.” He still expects further rate cuts this year.

In addition, if tensions in the Middle East ease, oil prices could fall back from current highs, and inflation could also be expected to move back toward the 2% target over time. If oil prices rise sharply and further suppress consumption and employment, the Fed may also be forced to cut rates to prevent an economic downturn.

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Markets involve risk; investment should be done with caution. This article does not constitute personal investment advice, and it does not take into account individual users’ specific investment objectives, financial conditions, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Invest accordingly at your own risk.

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责任编辑：郭建