The Fed’s interest-rate path hits a key turning point: shifting from rate-cut signals to a neutral wait-and-see stance

On May 2, Nick Timiraos, nicknamed the “Fed’s mouthpiece,” wrote that the debate within the Federal Reserve over the interest-rate path has undergone a fundamental shift. Instead of arguing about when to resume rate cuts, officials have begun to explore what conditions might require rate hikes. This change is especially evident in the statement following the April policy meeting: Dallas Fed President Logan, Cleveland Fed President Hammack, and Minneapolis Fed President Kashkari formally registered dissent, opposing keeping the wording that “the next step is more likely to be a rate cut.” The soon-to-depart Chair Powell acknowledged that the committee held “intense discussions” and made clear that the committee’s stance is moving from slightly dovish to neutral.

Why has the energy shock become the key variable driving the policy shift?

The direct external factor pushing this shift is the persistent energy shock resulting from the substantial closure of the Strait of Hormuz. Unlike past one-off price fluctuations that could fade on their own, the supply chain disruption this time is expected to keep energy costs elevated for months. Sustained energy price increases have the ability to permeate broader price levels and may directly push up longer-term inflation expectations. In his public remarks on Friday, Kashkari further outlined a rate-hike scenario: if the strait cannot quickly restore passage, a series of rate hikes may be needed, even if it means further weakening the labor market. This chain of logic shows that the supply-side shock is replacing demand-side management as the core variable in the Fed’s current decision-making.

What has happened inside the Fed as it shifts from rate-cut signals to neutral wait-and-see?

At its core, this adjustment by the Fed is a transition from “one-way releasing rate-cut expectations” to “two-way neutral assessment.” It is extremely rare in Fed history for three regional presidents to object to policy wording rather than actual interest-rate actions. The last time a similar situation occurred was September 2020. While Powell did not remove the relevant guidance for procedural reasons, he acknowledged that the arguments from the dissenters “completely hold up.” This stance means that even if short-term rates remain unchanged, the weighting of policy signals has shifted. The market’s previously familiar “Fed put option” logic is being weakened, replaced by a neutral reaction function that relies more heavily on real-time data.

Why could “not cutting rates” evolve into “needing to raise rates”?

Former Fed senior economist William English provides a key analytical perspective: holding interest rates steady during an inflation uptrend is, in effect, passive easing. When actual interest rates decline because inflation is rising, monetary policy’s restraining force on the economy weakens instead. If the energy shock keeps inflation elevated and the federal funds rate stays unchanged, the longer the situation lasts, the more pronounced the effect of passive easing on the policy stance becomes, potentially forcing the Fed to take rate-hike action to reestablish credible inflation constraints. The scenario Kashkari described—“raising rates even at the cost of the labor market”—is the extreme end of this logic.

The rarity of the Fed’s internal disagreement and historical references

Three regional presidents issuing formal objections to the wording of policy statements sends a signal that is more meaningful than the interest-rate change itself. Within the Fed’s decision framework, actual actions reflect current judgments, while disputes over wording foretell how deep future path differences may run. In September 2020, the background of similar controversy was the Fed’s rollout of a new policy framework; this time, the core of the disagreement is the conflict between an external supply shock and the internal inflation target. Notably, Powell’s term is nearing its end, and this debate will be carried forward by Kevin Warsh, who will take over as chair in mid-May. The next policy meeting will be held about a month after Powell steps down, meaning the leadership transition period may amplify policy uncertainty.

How will the shift in rate expectations affect risk pricing in the crypto market?

For crypto asset markets, as the Fed shifts from neutral-to-slightly-dovish to purely neutral wait-and-see, the most direct transmission path shows up in three dimensions. First, expectations that real U.S. dollar interest rates remain elevated for longer directly raise the opportunity cost of non-yielding assets. Second, the reappearance of discussions about rate hikes breaks the market’s one-way expectation that “rate cuts are just a matter of time,” and volatility pricing will adjust accordingly. Third, inflation driven by the energy shock is supply-side rigid; unlike the policy-response logic for traditional demand-driven inflation, this increases the difficulty of predicting the interest-rate path. Taken together, these factors point to a more complex macro pricing environment.

What policy balancing challenges will incoming Chair Warsh face?

Kevin Warsh, scheduled to take office in mid-May, faces an extremely complicated policy start. On one hand, he needs to address internal policy wording disagreements that have already become public, coordinating the stance gaps between the three dissenting regional presidents and other committee members. On the other hand, the persistence of the external energy shock cannot yet be assessed with precision, and if inflation expectation indicators show signs of losing their anchor, the new chair will be forced to make major policy choices early in his term. In addition, the Fed must find a balance between maintaining financial stability and curbing inflation—where the former points to maintaining or cutting rates, and the latter points to potentially raising rates. This trade-off becomes particularly sharp in the context of the energy shock.

How should market participants interpret the current neutral wait-and-see framework?

Neutral wait-and-see is not policy paralysis, but an actively preserved option. For participants in crypto markets, the key to understanding this framework is to distinguish between two types of signals: first, changes in real interest rates; second, changes in the weight of wording. At the current stage, the latter has higher predictive value than the former. When the focus of internal Fed controversy shifts from “when to cut rates” to “conditions for rate hikes,” even if the interest-rate numbers do not change, repricing of policy risk premia has already begun. Over the coming months, the market needs to closely watch two variables: any substantive change in the Strait of Hormuz’s navigation status, and the final determination by incoming Chair Warsh in his first policy meeting regarding the wording framework.

FAQ

Q: Has the Fed clearly indicated that it will raise rates soon?

A: The Fed has not announced a rate hike yet. The core change is that policy wording has shifted from “the next step is more likely to be a rate cut” to neutral wait-and-see. Three regional presidents raised objections, calling for removing the rate-cut-leaning wording and, for the first time, putting rate-hike conditions on the discussion table, but actual interest-rate actions have not been adjusted.

Q: How does the closure of the Strait of Hormuz affect the Fed’s interest-rate decisions?

A: The closure has led to sustained higher energy prices. Unlike past temporary price shocks, the current supply chain disruption is expected to last for months. Rising energy costs may permeate broad price levels and lift inflation expectations, forcing the Fed to reassess the risks of passive easing.

Q: How should the crypto market react to the Fed’s neutral wait-and-see framework?

A: Neutral wait-and-see extends expectations that real U.S. dollar interest rates will remain elevated, increasing the opportunity cost of non-yielding assets. At the same time, the return of rate-hike discussions breaks the one-way rate-cut expectation, making volatility pricing more complex. The market should focus on the predictability of supply-side inflation rather than the traditional demand-side logic.

Q: Will the policy direction change immediately after the new chair Warsh takes office?

A: Warsh will take office in mid-May, and the next policy meeting will be held about one month after his start. He needs first to address the internally publicized wording disagreements while assessing the persistence of the energy shock. In the short term, policy continuity may hold, but the probability of adjustments to the wording framework is higher.

Q: What additional impact might internal Fed disagreements have on market expectations?

A: The wording dispute itself releases a more forward-looking signal than interest-rate changes. The three regional presidents’ formal objections indicate that the committee has developed structural differences in its assessment of inflation risks, increasing the difficulty of predicting the policy path, and the market needs to price two-way risks.

Q: Under the current framework, which data are most important for the interest-rate path?

A: Two types of data are most critical: first, the Strait of Hormuz navigation status and the trajectory of energy prices, which directly determine the persistence of supply-side inflation; second, longer-term inflation expectation indicators—if signs of losing their anchor appear, they will become the trigger that forces the Fed to raise rates.