MNI FED WATCH: Growing Support For Move To Neutral Rate Bias

Federal Reserve officials are gradually moving away from a view held since 2024 that their next move is to lower interest rates and may adopt a neutral bias as soon as the June meeting amid the oil price shock, outgoing Fed Chair Jerome Powell said Wednesday.  

After a meeting in which three FOMC members dissented against the policy statement's current easing bias, Powell acknowledged the center of the committee is inching toward signaling a shift in forward guidance. 

"The number of people on the committee who either could support that language change -- changing to a more neutral stance so that a hike is likely as a cut -- that number has increased over the intermeeting period," he said. "You see inflation has moved up over the interim a bit. Core inflation is 3.2% now, moving albeit just a little bit in the wrong direction." 

A majority of the FOMC supports no guidance change at this point, Powell said. "And that's where I am. I get it though. At a certain point you would move, and that conceivably could come as soon as the next meeting." (See: MNI INTERVIEW: Fed Expected To Cut Rates Late In 2026- Ireland)

OIL SHOCK

All but one of 12 FOMC voters supported the Fed's decision to hold benchmark rates at 3.5-3.75% for a third straight meeting Wednesday, and "we are well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks," Powell said. 

The FOMC has been waiting to see if data bore out its base case that tariff-driven inflation will have played through the economy by mid-year to ease policy further. Now with soaring energy prices also pushing up transport, fertilizer and a range of other costs, the Fed finds itself again watching inflation rise, Powell said. 

"The question about looking through energy really is not in front of us right now. It hasn't even peaked yet. I think we want to see the back side of that and progress on tariffs before we even thought about reducing rates," he said. 

"You wouldn't necessarily react right away.  I think that is all the more true given we're several years above 2% inflation and that we're already looking through the tariff shock.  So I think we're going to be very cautious about that."

STAYING ON

With the Iran War contributing to high uncertainty and Kevin Warsh set to take over as Fed chair next month, there is no rush to signal a change in the Fed's policy stance, Powell said. 

Warsh at his confirmation hearing called for the Fed to stop providing forward guidance, and it's unclear how he will change the Fed's statement or post-meeting press conferences. (See MNI POLICY: Warsh Could Reshape Fed On Rates, Communication)

Powell said he would continue to serve on the FOMC as governor "for a period of time to be determined" after stepping down as chair until the Justice Department investigation over building cost overruns is "well and truly over with finality and transparency," but that he intends to keep a low profile. 

As chair, "your job is to create consensus," he said. Warsh "has the capabilities, skills to be very good at that I would think. So I'm not so worried about that process."