Recent statements from FED officials suggest that the interest rate reduction process may have come to an end.
While official projections maintain expectations of interest rate cuts later in the year, recent statements present a more uncertain and two-sided picture regarding the direction of monetary policy.
Until recent weeks, the prevailing expectation in the markets was that interest rates would follow a downward trajectory. However, tensions with Iran, in particular, have driven up energy prices, and tariffs have increased pressure on inflation, leading to a shift in the rhetoric of FED members towards a more hawkish tone. FED Board member Lisa Cook stated that the increase in energy prices has brought the risk of inflation back to the forefront, while Chicago FED President Austan Goolsbee indicated that even an interest rate hike could be considered if necessary.
Although the likelihood of an interest rate hike is still considered low, the explicit mention of this option is seen as a noteworthy change. FED Chairman Jerome Powell had also stated in recent meetings that no signal had been given indicating an upward trend in policy. Nevertheless, markets have begun to price in the possibility that the interest rate reduction cycle, which began in September 2024 and totaled six steps, may now be over.
These changing expectations were also reflected in the bond market. With the Iran war, a rapid rise in long-term interest rates was observed, and investors revised their forecasts for future interest rate levels upwards. This situation caused an increase in financing costs, especially mortgage interest rates, directly affecting households and businesses.
A significant aspect of the shift in rhetoric within the Fed is that even members previously considered dovish or neutral have begun to adopt a more cautious stance. Board member Christopher Waller stated that he supports keeping interest rates stable due to the impact of developments in the Middle East on inflation, while San Francisco Fed President Mary Daly indicated that the published “dot plot” projections regarding the interest rate path may be misleading.
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Macroeconomic data presents a mixed picture. In February, more than 90,000 jobs were lost, and the unemployment rate rose to 4.4%. However, inflation remains above the Fed’s 2% target, hovering around 3%. Economists believe that a decrease in tensions in the Middle East could lead to a decline in oil prices and a return to a downward trend in inflation.
On the other hand, some Fed officials believe that the policy interest rate may already be approaching a “neutral” level. Fed Vice Chairman Philip Jefferson and Richmond Fed President Thomas Barkin stated that the recent cuts may not have brought interest rates to a point of equilibrium that neither suppresses inflation nor supports growth. In this case, further interest rate cuts risk reigniting inflation.
Consequently, a growing view within the Fed is that the interest rate reduction cycle may have come to an end.
*This is not investment advice.
