Interest rate cuts 3 times? The Fed suddenly signals major changes!

The latest speeches from Federal Reserve officials send strong signals.

According to recent reports, Vice Chair Michelle Bowman stated that she is concerned about the labor market and still expects the Fed to cut interest rates three times this year. On the same day, Fed Governor Christopher Waller also said that if signs of weakness appear in the job market, he would support rate cuts again later this year.

As conflicts in the Middle East escalate and international oil prices soar, Wall Street is buzzing that U.S. inflation may pick up again, potentially prompting the Fed to pause or even raise rates. According to CME FedWatch Tool, traders on Wall Street now see over a 30% chance of rate hikes before the end of the year. However, U.S. economists still believe that the likelihood of the Fed cutting rates in 2026 remains higher than that of raising them, especially if the oil price surge caused by the Iran conflict subsides.

At a critical moment, the leadership transition at the Fed faces significant uncertainty. President Trump has stated that he still supports the Department of Justice’s investigation into Fed Chair Jerome Powell. Some analysts suggest this stance could further delay the confirmation of Powell’s potential successor, Kevin Warsh.

“The Fed will cut rates three times this year”

On March 20, Eastern Time, Vice Chair Bowman, who oversees regulation at the Fed, said she still expects the Fed to cut rates three times this year.

She believes it is too early to assess the impact of the Iran conflict on monetary policy.

Bowman added that she expects the economy to grow strongly this year, thanks to the Trump administration’s supply-side policies, despite her concerns about the labor market. She also predicted that if Kevin Warsh is confirmed as Powell’s successor, he would have a “significant impact” on the Fed.

On the same day, Fed Governor Waller also said that if signs of weakness emerge in the job market, he would support rate cuts again later this year, while remaining cautious about potential inflation pressures from current geopolitical tensions.

Waller pointed out that the closure of the Strait of Hormuz signals greater inflationary pressure, and rising oil prices could eventually impact core inflation. He emphasized that the current cautious stance does not mean the Fed will remain on hold for the rest of the year.

On Wednesday, Eastern Time, the Fed announced that the federal funds rate target range would remain at 3.5%–3.75%, in line with market expectations. Of the 12 FOMC members, 11 supported holding rates steady, with only Fed Governor Stephen M. Miller supporting a 25 basis point cut.

Powell also noted at the press conference that recent short-term inflation expectations have risen, possibly reflecting energy market volatility; however, long-term inflation expectations remain broadly stable around the 2% policy target.

He also emphasized that the evolving situation in the Middle East introduces high uncertainty for the U.S. economy, and the Fed will closely monitor related risks.

Notably, when asked about the chairmanship succession, Powell said that if his term expires before a successor is confirmed, he will continue to serve until a new chair is in place.

Guosheng Securities pointed out that the Middle East situation is pushing up energy prices, gradually tightening global liquidity and suppressing market risk appetite. Powell revealed that the meeting discussed the possibility of further rate hikes, and market expectations for rate cuts this year have significantly decreased, with fewer than one expected for the year, and some betting that there will be no rate cuts this year.

Guosheng Securities warned that rising oil prices could feed into inflation, potentially leading the Fed to pause or even consider rate hikes, increasing the risk of stagflation. They also advised caution regarding a deep correction in the stock market.

Additionally, recent data shows that the U.S. Producer Price Index (PPI) for February increased by 0.7% month-over-month, above the expected 0.3%, with the previous 0.5%; year-over-year, it rose by 3.4%, hitting a one-year high, compared to an expected 2.9%.

Uncertainty in the Fed Chair Transition

Meanwhile, the transition of the Fed chair also faces major uncertainties.

On March 19, Eastern Time, President Trump publicly reiterated his support for the Department of Justice’s criminal investigation into Powell and sharply criticized Powell as “incompetent and dishonest.”

This stance has directly complicated the confirmation process for Kevin Warsh, Powell’s potential successor, and reignited debates over the Fed’s independence.

Trump stated, “He is under investigation because the cost of his building projects exceeded expectations by hundreds of millions of dollars.” He added, “This indicates criminal conduct, possibly involving contractors.”

He was referring to the renovation of the Fed headquarters in Washington, which is the focus of a federal criminal investigation led by U.S. Prosecutor Jeanine Pirro into Powell.

In January, the Department of Justice issued subpoenas to Powell and the Fed regarding cost overruns in the Washington headquarters renovation. Last week, U.S. District Judge James Boasberg issued a strongly worded ruling blocking the grand jury from issuing subpoenas in the investigation. The judge wrote, “There is substantial evidence suggesting that the government issued these subpoenas to pressure the Chairman into voting for rate cuts or resigning.”

Sources say that the judge’s ruling initially provided Trump’s administration with a “way out,” allowing them to end the investigation into Powell and ease tensions. However, continuing legal battles could mean waiting longer for Warsh’s appointment.

Senator Thom Tillis has repeatedly stated that he will block Warsh’s nomination in the Senate Banking Committee until the Justice Department drops its investigation into Powell. Warsh must first be approved by the committee before a full Senate vote.

Tillis expressed support for Warsh but argued that the investigation undermines the Fed’s long-standing independence from political interference. “If the market suddenly believes the Fed Chair is simply following the President’s orders, I can’t imagine what the market reaction would be,” he said.

It is reported that Powell’s term as Fed Chair will end in May this year, while his term as a governor will last until 2028.

(Original source: China Securities Journal)