US Fed, 'Hawkish Freeze' Amid Inflation Concerns Triggered by Middle East War

US Fed, 'Hawkish Freeze' Amid Inflation Concerns Triggered by Middle East War

Three committee members opposed 'easing bias' phrase...blocking interest rate cut expectations

Differences in views emerge ahead of Kevin Warsh's inauguration...Wall Street "expects freeze until year-end"

The U.S. central bank, the Federal Reserve (Fed), held a Federal Open Market Committee (FOMC) meeting on the 29th (local time) and froze the benchmark interest rate. However, the decision is interpreted as a 'hawkish (preferring monetary tightening) freeze' given that three members issued a 'dissenting opinion' to block expectations of future interest rate cuts.

As Kevin Warsh, the nominee for the next Fed chair, is expected to lead the Fed from next month, the change in the Fed's leadership and the divergence of views among committee members, coupled with economic uncertainty due to the US-Iran war, are expected to be factors increasing the Fed's policy uncertainty.

Ahead of the FOMC decision, market experts had no disagreement that the Fed would freeze the benchmark interest rate at the current 3.50-3.75%, reflecting the surge in oil prices and increased economic uncertainty due to the Iran war.

Michael Feroli, chief economist at JPMorgan Chase, predicted in a policy outlook report released ahead of the April FOMC that the Fed would keep interest rates frozen for the remainder of this year. He further anticipated that the next policy move would be an increase, not a cut, stating that rates would be raised by 0.25 percentage points in the third quarter of next year.

He explained that the persistently high inflation and the risk of it rising further act as factors preventing interest rate cuts, while concerns about a unstable labor market act as factors making the Fed hesitate to raise interest rates, with these two factors working in opposing directions.

The continuing uncertainty about how the surge in oil prices due to the US-Iran war will affect the US economy is also cited as a factor that makes policy changes hesitant.

Nancy Vanden Houten, lead economist at Oxford Economics, anticipated an interest rate freeze in an investor note on the April FOMC outlook, stating, "It is difficult to predict inflation due to the uncertainty about how long this war will last and how long it will take for oil production to return to normal levels and prices to fall after the war ends."

The US Consumer Price Index (CPI) for March, reflecting the post-war situation, surged 0.9% month-over-month due to rising gasoline prices, recording the largest monthly increase since 2022. However, the core CPI, excluding energy and food prices, rose only 0.2% month-over-month, showing a relatively modest increase.

Christopher Waller, a Fed governor considered a dove (preferring monetary easing) among FOMC members, recently stated at a public event that "if the Strait of Hormuz opens and trade flows return to some degree of normalcy, the impact of recently elevated energy prices on inflation could be negligible."

The FOMC, in its policy statement after freezing rates today, assessed that "inflation has risen, partly reflecting recent increases in global energy prices," but also noted that "the situation in the Middle East is creating high uncertainty for the economic outlook."

Market attention is focused on what changes will occur in the Fed's monetary policy if candidate Warsh takes office as Fed chair.

Ahead of the FOMC results announcement today, the U.S. Senate Banking Committee approved Warsh's nomination.

With the uncertainty of the committee vote that had blocked the approval now cleared, candidate Warsh is expected to smoothly take office after the current Fed Chair Jerome Powell's term ends on May 15, following a full Senate confirmation vote.

Chair Powell said at today's press conference, "Today's press conference will be my last as chair," and "I congratulate the Senate Banking Committee on approving Warsh's nomination."

However, he stated that he would retain his position as a Fed governor even after his term as Fed chair ends on May 15. Powell's term as a Fed governor, separate from his term as chair, runs until January 2028.

Wall Street experts note that while candidate Warsh did not indicate during his confirmation hearing that he would comply with former U.S. President Donald Trump's demands for interest rate cuts, they believe that the change in leadership has increased future uncertainty in Fed policy.

During his confirmation hearing on the 21st, candidate Warsh stated that "presidents tend to prefer interest rate cuts," but also that "the Fed's independence rests with the Fed itself," expressing his stance to decide monetary policy based on the Fed's independent judgment.

Along with Chair Powell's indication to remain a governor, having resisted President Trump's demands for interest rate cuts, the three Fed members' negative stance on interest rate cuts today is also expected to widen internal disagreements, making future policy change predictions difficult.

Three members, Beth Hammack, Neel Kashkari, and Lorie Logan, agreed to freeze interest rates in today's decision but opposed including the phrase 'easing bias' in the policy statement at this time.