Powell's hawkish signals may suggest the Federal Reserve is feeling its way across the river

Reuters, Orlando, Florida, June 19 - The Federal Reserve (Fed) slightly shifted to a hawkish stance on Wednesday, indicating greater concern about rising inflation rather than slowing growth. However, Chairman Jerome Powell stated that this outlook should be viewed with caution.

The Fed's revised economic forecasts show that policymakers expect the U.S. unemployment rate and inflation rate to rise in the coming quarters, while economic growth will slow. The risk of "stagflation" is increasing. However, unlike most other G10 central banks, the Fed has refused to preemptively cut interest rates, choosing instead to wait until the inflation outlook caused by tariffs becomes clearer before deciding on the next steps.

This is understandable. The full impact of President Trump's tariffs on prices and economic activity will only become apparent after July 9, when the so-called "reciprocal" tariff suspension period ends. At the same time, new geopolitical risks are rising as the war between Israel and Iran escalates, pushing oil prices higher.

In this context, as Powell described the Fed's current stance, maintaining a "moderately" restrictive policy is reasonable.

However, he believes that despite the economy and job market remaining "robust," the outlook for economic growth is deteriorating as rapidly as the inflation outlook. Fed officials predict that the cumulative GDP growth rate for 2025-2027 will be about 1.25 percentage points lower than the forecast made in December, while the cumulative inflation rate will be about 1 percentage point higher.

If the risks of economic growth and inflation are roughly balanced, then why are officials lowering the interest rate expectations for the next two years by 25 basis points, or in other words, why are they envisioning a higher "terminal" rate?

Chart: Fed Dot Plot

Hawkish Tendencies

This hawkish tendency may primarily be aimed at controlling confidence. The central bank's top priority is to anchor inflation expectations, and recent surveys have shown that consumers' expectations for rising prices have surged to the highest levels in decades.

However, there may be other motivations for maintaining this hawkish stance.

First, the Fed missed the inflation surge of 2021-22 and was embarrassed by claiming that rising prices were "transitory." The subsequent criticism stung policymakers. Whether this criticism is justified is debatable, as no major central bank made the correct judgment, but nonetheless, the Fed does not want to risk repeating the same mistake.

Additionally, the risks associated with U.S. fiscal and institutional matters are continuously growing. Persistent budget deficits, rising debt burdens, budget-busting tax and spending bills, and a global decline in confidence in the dollar and U.S. assets have combined to keep U.S. long-term Treasury yields high. This may also imply a need to raise long-term policy rates.

Finally, Trump has repeatedly verbally attacked the Fed, particularly Powell, for not cutting interest rates. This public criticism may actually backfire, prompting the Fed to publicly demonstrate its independence to dispel any doubts about political interference.

Powell will almost certainly downplay or directly deny these motivations, but they will continue to influence investors' interpretations of the Fed's actions.

Chart: Interest Rate Changes of G10 Central Banks

Waiting and WatchingUltimately, the most important factor currently affecting the Federal Reserve may be a simple fact: the Federal Reserve does not know what will happen next.

"The uncertainty surrounding economic decision-making is very high right now. Other countries are not experiencing the same situation. The U.S. situation is very unique," said Mike Konczal from the Economic Security Project.

Powell just wants to wait and see how things develop once Trump's tariff policy is finalized and implemented. In this environment—especially when the economy still appears to be quite healthy—it is reasonable to prefer inaction.

However, this also raises questions about the utility of the Fed's "dot plot," which is a visual representation of the year-end interest rate forecasts from all 19 Federal Reserve officials.

"No one has complete confidence in these interest rate paths," Powell told reporters on Wednesday. In a situation of high uncertainty, it should be viewed as the most likely path among less likely options.

It seems the Federal Reserve is saying, "We don't know what will happen. Let's check back in a few months."

The Federal Reserve's next economic forecast revision will be in September, by which time tariffs, Middle East tensions, and the U.S. fiscal outlook should be clearer. Until then, Powell and his team will have to wait and see like the rest of us.

Figure: Federal Reserve's forecast for cumulative GDP growth