Fed Officials Point Toward Ending Easing Bias, But Leaving Rates on Hold

– Dissenters Hammack, Kashkari Focus on Inflation; Muse About Possible Rate Hikes

– Williams, Others See Monetary Policy as “Well-positioned’ for Foreseeable Future

– Weight of Official Concerns Has Shifted Away from Jobs to Inflation

By Steven K. Beckner

(MaceNews) – Federal Reserve officials have given additional hints this week that the easing bias the Fed’s policymaking Federal Open Market Committee has had in place since its last 2025 interest rate cut may soon become a thing of the past.

That does not necessarily mean the FOMC is on the verge of swinging to rate hikes. Although musings about rate hikes have increased, and although the FOMC could take the intermediate step of issuing a symmetrical directive in June, preparatory to a later tightening bias, most indications are that monetary policy is firmly ensconced in the status quo.

Such are the gleanings from comments by New York Federal Reserve Bank President John Williams and a host of other policymakers in recent days.

An eventual rate cut still cannot be ruled out. If tariff and other inflationary influences fade and/or if slowing GDP growth weakens the labor market, it’s conceivable the FOMC might get back to easing.

For now, though, most officials continue to echo Chair Jerome Powell in describing policy as “well-positioned” or “in a good place” to “wait and see” how the economy responds to developments in the Middle East and elsewhere – rhetoric that points to an extended pause.

But Powell said “the center is moving toward a more neutral place” following the April 29 FOMC meeting, when three Federal Reserve bank presidents dissented in favor of dropping the easing bias. He hinted that a majority may support doing so before long.

The pending demise of the easing bias reflects the fact that risks to the Fed’s “dual mandate” have tipped to greater concern about inflation than about employment, but it would probably take a lot to provoke the FOMC to overcome its inertia and actually raise the federal funds rate, especially with Powell’s nominated successor Kevin Warsh about to take the reins.

With gasoline prices averaging $4.50 per gallon nationally on top of lingering tariff effects, Fed officials are increasingly concerned about a kind of “cost-push inflation,” even while recognizing that higher pump prices also drain disposable income and hurt consumer spending. Although hopes for a peace settlement in the Middle East have lately brought down oil prices from a peak near $126 per barrel to $94, Fed officials remain worried and unsure.

Most recently, Thursday, Minneapolis Fed President Neel Kashkari, one of the dissenters against keeping the easing bias, described himself as “very cautious” about the outlook for inflation and said the Fed’s next rate move might need to be “up.”

Cleveland Fed President Beth Hammack, another dissenter, said Thursday her outlook is that “interest rates will be on hold for quite some time.”

Boston Fed President Susan Collins isn’t voting this year, but she too said Thursday that she would have preferred dropping the easing bias and said rates probably need to stay at current levels “for a longer time period,”

Similar sentiments were expressed earlier in the week by St. Louis Fed President Alberto Musalem, Chicago Fed President Austan Goolsbee and Governor Michael Barr.

When the FOMC left the funds rate in a target range of 3.5% to 3.75% on April 29, it also left unchanged its “forward guidance,” which again stated, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”

By referring to “additional adjustments,” as it had following the last of three rate cuts on Dec. 10, the FOMC leaned toward a resumption of rate cuts at some point. But after holding the funds rate steady for three straight meetings, Kashkari, Hammack and Dallas Fed President Lorie Logan dissented in favor of dropping that “easing bias” on April 29, and Powell strongly hinted the FOMC could move to more “neutral” or symmetrical forward guidance before long – perhaps at the next meeting June 16-17.

Powell said moving to symmetrical forward guidance would be a prerequisite to adopting a tightening bias, which would in turn open the door to actual rate hikes later this year if inflation remains “elevated” and the economy remains “solid.”

“A majority of us didn’t feel like we needed to send a signal on that right now,” Powell told reporters. “But maybe it will come to that. And the reason is because, you know, we’re kind of waiting to see what happens with events in the Middle East and what are the implications of those events for the U.S. economy.”

“So, there is a group who feels like we don’t need to be in a hurry to do that,” he continued. “We get it. And of course we will move to a hiking bias if we want a hike. And we’ll move to a neutral bias before that.”

Powell added, “There was a difference over whether to do it at this meeting. At a meeting at which all but one of us agree that the rate decision was correct which was not the move.“

Last Friday, all three dissenters issued special statements explaining why they felt it was “no longer appropriate” to lean toward a resumption of rate cuts given uncertainties about the economic outlook and about inflation in particular.

Logan said she was “increasingly concerned about how long it will take inflation to return all the way to the FOMC’s 2% target.”

“Even before recent increases in the prices of energy and other commodities, those (inflation) measures had been running meaningfully above 2%,” she said, adding that depending on how the Iran war and other factors affect inflation, “it could plausibly be appropriate for the FOMC’s next rate change to be either an increase or a cut.”

Kashkari and Hammack continued to defend their dissents Thursday. Despite the FOMC’s decision to keep the easing bias, the fact is that “we just didn’t know” what the next Fed move might need to be, the former said.

With inflation having exceeded target for five years, “I for one am very cautious about where inflation headed,” Kashkari told a Northern Michigan University audience, adding that “the danger is people begin to think (3% inflation) is the new normal.”

“Given the uncertainty around the Iran war, we don’t know what the future holds….,” he went on, adding that “the next move may need to be up.”

Hammack, meanwhile, said, “My outlook right now is that interest rates will be on hold for quite some time.”

“Based on what I see right now, I see a lot of uncertainty in the economic outlook” and “I think our statement ‌should have a pretty neutral ⁠stance about whether the next move is down or up or just on hold for a really long period of time,” she ⁠said in a WOSU Radio interview.

Hammack described the labor market as relatively stable, whereas “we have been missing our 2% (inflation) objective for the past five years, and with the pressures that we see right now coming from the conflict in Iran, it could mean that those pricing pressures are going to be more persistent.”

Likewise, non-voter Collins said she was “strongly supportive” of leaving the funds rate unchanged, but would have preferred that the FOMC statement “not be as closely aligned with language that has been associated with the presumption that the next move will be a cut.”

Calling herself “agnostic” on the future rate path, she said rates are likely to remain on hold “for a longer time period, with further easing further down the road,” but added that “there are scenarios in which it would be important to strongly consider a hike.”

“It’s more the persistence of inflation that I’m focused on,” Collins said.

Earlier in the week, other officials had similar types of concerns.

Most notably, Williams said Monday that the Iran war has introduced “significant and unpredictable risks” and “heightened uncertainty” about the outlook but suggested there is no need to change monetary policy as yet, because it is already “well positioned” to deal with risks to the Fed’s dual mandate of “maximum employment” and “price stability.”

“The elevated levels of inflation, mixed signals from the labor market, and heightened uncertainty from the Middle East conflict present an unusual set of circumstances, but the current stance of monetary policy is well positioned to balance the risks to our maximum employment and price stability goals,” the FOMC Vice Chairman said, adding that “the Middle East conflict has introduced significant and unpredictable risks to economies across the globe, and it came amid what was already an uncertain and unusual environment in the U.S………..

Before the Iran war, “uncertainty stemmed from trade and other government policies,” he noted. “Those forces are still in play. Nonetheless, the U.S. economy has so far remained remarkably resilient….”

Williams said “the labor market has shown conflicting signs: Much of the hard data points to stabilization, while some of the soft data suggest continued gradual slowing …. At 4.3%, the unemployment rate has changed little over the past nine months, and payroll growth has remained low but at levels consistent with underlying labor force growth…..”

But he said, “some soft data suggest a less sanguine view” and said the labor market “bears continued close monitoring for signs that conditions are shifting.”

Like many of his colleagues, Williams sounded more concerned about inflation, saying he expects it to “remain elevated” because of continuing tariff effects and the oil price spike.

Barr usually refrains from commenting on the economy and monetary policy, but Tuesday he pointed to spillover from gasoline to other consumer prices. “The most immediate effect is a significant increase in prices, particularly for gas at the pump,” he said. “Consumers are feeling that a lot and it could bleed over into other prices.”

Musalem was blunt Wednesday in saying the balance of risks which monetary policymakers must weigh is “shifting’ toward greater concern about inflation and less about employment. He said there are “plausible scenarios” where the funds rate would need to stay where it is “for some time,” but also ones where the FOMC might need to either raise or lower it.

Musalsem simultaneously expressed heightened concern about inflation and deemphasized threats to economic growth and employment Wednesday, opening the door to eventual rate hikes.

Assessing the economy for a group of Mississippi bankers, he said that, despite Middle East uncertainties, “the tailwinds are stronger than the headwinds.” Among the tailwinds, he listed “very accommodative” financial conditions.

Musalem, who won’t be voting again until 2028, said “the labor market seems to have stabilized,” with payroll gains “at break-even” (the pace of job gains needed to keep the unemployment rate from rising) and the 4.3% unemployment rate “near the natural rate of unemployment.”

By contrast, he said inflation is running more than a percentage point over the Fed’s 2% target and said even longer term inflation expectations are “drifting up.”

So, “the risks going forward are shifting,’ Musalem said. “There are risks on both sides…, but the risks are shifting more to the inflation side than the unemployment side.”

As for what that means for monetary policy, he said “there are very plausible scenarios which would require us to keep the policy rate at the present level for some time.” At current levels, he said the funds rate is “either neutral or slightly accommodative in real terms.”

Goolsbee, who will return to the FOMC voting ranks next year, put forth another case for potential rate hikes, which ran against the grain of much Fed thinking, on Wednesday.

Some, including Warsh, have contended that accelerating productivity growth will help the economy grow faster without wage-price pressures and allow the Fed to lower interest rates. Just such a belief led the Fed to avoid rate hikes in the late 1990s under the guidance of former Chair Alan Greenspan.

But Goolsbee sharply contradicted such hopes. Far from containing inflation and enabling rate cuts, AI-driven productivity growth could well have the opposite effect, he told a Milken Institute conference.

If productivity gains cause an increase in expected future income, “it can lead to increased spending and potentially overheat the economy before the productivity boom has actually

arrived,” he warned. “In that case, the fundamentals suggest rates would need to rise…..”

“(W)e need to keep an eye on the forecasts and expectations of how much of the productivity surge is still to come,” Goolsbee said. “The bigger the hype, the more rates would need to rise to prevent overheating.“

Driving the evolution of Fed thinking has been the worrisome behavior of inflation. Though down from its 9.1% peak, inflation has been running above the Fed’s 2% target for five years, and there are signs that inflation expectations, the holy grail of monetary policy, are starting to erode. As Powell has repeatedly said, the Fed’s hope and expectation was that Trump’s tariff hikes would be just a “one-time” thing with little pass-through to other prices, but before tariffs had a chance to completely wash through the economy, the war with Iran has brought another “shock” to inflation. Soaring oil prices have pushed gasoline prices to an average $…. per gallon, and although Trump has promised they will come down when the war is over, the fear at the Fed is that higher prices at the gas pump will feed through to food and other prices. While that could have adverse effects on the “maximum employment” side of the Fed’s dual mandate, officials primary concern is what it will mean for the “price stability” side.

Last Thursday, the Commerce Department reported that its price index for Personal Consumption Expenditures (PCE), the Fed’s favorite inflation gauge, rose 3.5% year-over-year in March, up from 2.8% in February. The more closely watched “core” PCE rose 3.2%, up from 3.0%..

Goolsbee called the report “bad news” and said, “”We have got to get some assurance that we are going back to the 2% inflation target,”

Fed officials have continued to call inflation expectations, at least for the longer run, “well-anchored,” but that claim has been eroding. In April, the University of Michigan’s consumer sentiment survey showed expectations for inflation over the next year surging from 3.8% to 4.7%. Consumer expectations for inflation over the next five years were less but still jumped from 3.2% to 3.5%. The New York Fed’s Survey of Consumer Expectations, which Fed officials tend to rely on more despite its shorter track record, shows stability in longer term inflation

expectations.

Hanging over future monetary policy decision making is Warsh’s pending replacement of Powell.

Warsh, President Trump’s nominee to succeed Powell when his term as chair expires May 15, has advocated lower rates in the past, and his selection was widely seen as a quid pro quo for taking that position. But the former Fed governor swore in his Senate Banking Committee confirmation that he will not be a puppet for the president.

A test of his avowed independence could some relatively soon after his presumed confirmation by the full U.S. Senate, his nomination having been approved by the Senate Banking Committee on April 29.

That could set up good theater at the June FOMC meeting, with Powell planning to stay on as a governor and with the Committee already sharply divided.