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The latest speech by a Fed official sent a big signal.
According to the latest news, Federal Reserve Vice Chairman Michelle Bowman said she is worried about the job market and still expects the Fed to cut interest rates three times this year. On the same day, Federal Reserve Governor Christopher Waller also said that if the job market shows signs of weakness, he will again support an interest rate cut later this year.
As the conflict in the Middle East escalates and international oil prices soar, Wall Street is discussing that U.S. inflation may re-heat and prompt the Federal Reserve to suspend interest rate cuts or even switch to raising interest rates. According to the CME Fed Watch tool, Wall Street traders predict that the probability of the Federal Reserve raising interest rates by the end of this year has risen to more than 30%. But economists at Bank of America still believe that the Fed is still more likely to cut interest rates than to raise them in 2026, especially if the impact of rising oil prices caused by the Iran war subsides.
At this critical moment, there are great variables in the change of the chairman of the Federal Reserve. U.S. President Trump said he still supports the U.S. Department of Justice's investigation of Federal Reserve Chairman Jerome Powell. Some analysts pointed out that this stance may further delay the confirmation of Kevin Warsh, the potential successor to Federal Reserve Chairman Powell.
"The Fed will cut interest rates three times this year"
On March 20, EST, Bowman, the Fed’s vice chairman for supervision, said that she still expected the Fed to cut interest rates three times this year.
She believes it is too early to assess the impact of the Iran war on monetary policy.
Bowman added that she expected strong economic growth this year, helped by the Trump administration's "supply-side policies," even as she expressed concerns about the labor market. She also predicted that Kevin Warsh would have a "significant impact" on the Fed if he was confirmed to succeed current Chairman Jerome Powell.
On the same day, Fed Governor Waller also said that if the job market shows signs of weakness, he will again support interest rate cuts later this year, while remaining vigilant about the inflationary pressure that may be brought about by the current geopolitical situation.
Waller pointed out that the closure of the Strait of Hormuz portends greater inflationary pressures, and rising oil prices may ultimately affect core inflation. He emphasized that the current cautious attitude does not mean that the rest of the year will be on hold.
On Wednesday Eastern Time, the Federal Reserve announced that it would keep the target range for the federal funds rate unchanged at 3.5%-3.75%, in line with consensus market expectations. Judging from the voting results, 11 of the 12 members of the Federal Open Market Committee (FOMC) supported no action, and only Federal Reserve Governor Stephen Millan supported a 25 basis point interest rate cut.
Powell also pointed out at the post-meeting press conference that short-term inflation expectations indicators have risen recently, which may reflect the impact of energy market fluctuations; however, long-term inflation expectations are still generally stable near the 2% policy target.
He also emphasized that the impact of the evolving situation in the Middle East on the U.S. economy is highly uncertain, and the Federal Reserve will pay close attention to related risks.
It is worth noting that when asked about issues related to the chairman's term, Powell said that if his successor has not completed the confirmation process when his term expires, he will continue to perform his duties until the successor is in place.
Guosheng Securities pointed out that the situation in the Middle East has pushed up energy prices, and global liquidity will gradually tighten, suppressing market risk appetite. Powell revealed that the possibility of subsequent interest rate hikes was discussed at the meeting, and the market's expectations for an interest rate cut by the Federal Reserve have dropped significantly. There have been less than one expected rate cut during the year, and some even bet that there will be no interest rate cut this year.
Guosheng Securities reminds that rising oil prices may lead to rising inflation, which may lead to the Federal Reserve suspending interest rate cuts or even discussing raising interest rates, increasing the possibility of economic stagflation, and recommends being wary of the risk of deep adjustments in the stock market.
According to the latest data, the U.S. producer price index (PPI) rose 0.7% month-on-month in February, with an expected value of 0.3% and the previous value of 0.5%; the year-on-year increase reached 3.4%, a new high in a year, with an expected value of 2.9%.
Variables in the change of Fed chairman
At the same time, the change of chairman of the Federal Reserve also brought major changes.
On March 19, Eastern Time, US President Trump once again publicly supported the Department of Justice's criminal investigation of Powell in the Oval Office and slammed Powell as "incompetent and dishonest."
This statement directly aggravated the deadlock in the confirmation process of Kevin Warsh, and the controversy over the Fed's policy independence has once again heated up.
"He's under investigation because it cost him tens of billions of dollars more to build the building than expected," Trump said. "It shows there was criminal activity, maybe related to the contractor," he added.
Trump was referring to a renovation project at the Federal Reserve headquarters in Washington that is the focus of a federal criminal investigation into Powell led by U.S. Attorney Jeanine Pirro.
The U.S. Department of Justice issued subpoenas to Powell and the Federal Reserve in January this year to investigate cost overruns in the renovation project of the Washington headquarters. In a scathing ruling last week, U.S. District Judge James Boasberg blocked a Washington grand jury subpoena in the investigation. "There is substantial evidence that the administration issued these subpoenas to the Fed Board of Governors in an effort to pressure the chairman to vote for a rate cut or resign," he wrote.
People familiar with the matter said that the judge's ruling originally provided a "step down" for the Trump administration to end the investigation of Powell and allow the controversy to gradually subside. But if the legal battle continues, Trump may have to wait longer to bring Kevin Warsh into office.
Republican Senator Thom Tillis has repeatedly said he would block Warsh's nomination from advancing before the Senate Banking Committee until the Justice Department drops its investigation into Powell. Warsh must be approved by the committee before being submitted to the full Senate for a vote for confirmation.
Tillis said he personally recognized Warsh but believed the investigation undermined the Fed's longstanding independence from executive branch interference. I can't imagine the market reaction if the market suddenly thinks that the Fed chairman is taking orders from the president.
It is reported that Powell’s term as Fed chairman will end in May this year, and his term as a governor will last until 2028.
