MNI INTERVIEW: Hawkish Fed Tilted Toward Hikes, Says Groen

Federal Reserve officials are increasingly likely to push interest rates higher as inflation proves more stubborn than they thought earlier in the year, though a tightening cycle is not yet a foregone conclusion and depends on the extent of second-round effects from the Iran shock, former New York Fed economist Jan Groen told MNI. 

“It’ll be hard for Warsh to stem the hawkish tide within the FOMC,” said Groen in an email exchange. “The Committee has shifted towards a more of hawkish outlook centered on inflation worries, especially now that the jobs reports since the start of the year have come in meaningfully strong.”

Groen said he has not changed his official call for the Fed to stay on hold through the end of 2027 just yet. But he added: “The risks of the start of a hiking cycle have gone up meaningfully and the direction of travel will be up."

"The biggest uncertainty in this regard for me is the timing and duration. Unless we have an unpleasant core inflation print soon, I’m not so sure we’ll have a hike in the immediate future.” (See MNI INTERVIEW: Fed’s Next Rate Move Most Likely Upward-Kohn)

Groen noted that even more hawkish FOMC members indicated in public comments ahead of the June meeting that hikes might be needed later in the year, which he interprets as coming somewhere close to year end. 

“When you look at the dots to show hikes for 2026 you could roughly see a potential start date for hikes at the October meeting, but I’m not so sure that Warsh would go along with that as it is right at the doorstep of the midterms,” he said.  

INFLATION MOMENTUM

The inflation picture has deteriorated significantly in the past couple of months, with PCE inflation hitting 3.8% in April while core prices rose 3.3%. Warsh’s first meeting saw a notable hawkish shift in rate forecasts, with nine officials penciling in a hike this year. 

“I have argued for a while that the inflation momentum was heading in the wrong direction well before the Iran war, especially core services inflation has been stuck at an average well above target-consistent levels,” wrote Groen, now chief U.S. economist at Societe Generale. “The impact of structurally higher tariffs and the Iran war have only amplified these trends."

He said the conflict in the Persian Gulf has heightened worries among FOMC members that supply shocks might be a more recurring feature of the global economic landscape.

“For many Fed officials the Iran war-induced oil price shock served as a wake-up call to the dangers of tolerating a persistent overshoot of the Fed’s nominal anchor: in an environment where inflation shocks happen more frequently, at some point a sequence of those shocks could dislodge inflation expectations with all the unpleasant consequences that come with it.”

If the Fed does hike rates, it will probably deliver about three quarter-point hikes that more or less take back the three “insurance cuts” of late 2025, said Groen. 

LESS TALK, MORE VOL

Groen said Warsh will bring considerable changes to the Fed’s communications approach, including likely doing away with the Summary of Economic Projections. 

“Warsh clearly doesn’t like the SEP as well as too-detailed speeches spelling out a Fed official’s outlook,” said Groen. 

“If, instead, we are doing away with more explicit guidance and scenario discussions and have public Fed remarks that are mostly ‘light’ on content, markets will face a lot of uncertainty, not only about the medium-term path of the policy rate but also the immediate policy rate decision. Nonetheless, I believe this communications task force will push in this direction – and likely do away with the SEP,” he added. 

“So, as was the case in the Greenspan era, the likelihood of surprise rate decision will go up and consequently structurally higher bond market volatility will become a feature of the Warsh Fed.”