By Matt Grossman

Officially, Federal Reserve policymakers are still projecting interest-rate cuts later this year.

But listen carefully, and a different message emerges. With inflation elevated by tariffs and oil, and the labor market soft but not collapsing, some officials are hinting that their next move could be either higher or lower.

It is a subtle but significant shift. As recently as a few weeks ago, the path looked firmly downward. But in the past week, many officials have sounded hawkish notes. Governor Lisa Cook, who consistently votes with the Fed's majority, said that as higher energy prices from the Iran war add to price pressures, prolonged inflation is again the dominant risk that the Fed faces.

Chicago Fed President Austan Goolsbee became one of the first officials to explicitly invoke the possibility of an increase. "We could be back to the era of multiple rate cuts for the year, if inflation behaves," he told CNBC. "I could see circumstances where we would need to raise rates."

A rate increase remains unlikely. But even raising the possibility is noteworthy. At the Fed's past two meetings, officials decided against publicly saying the next move could be upward, Chair Jerome Powell said this month.

Even if rates don't rise, the odds are increasing that the string of six rate cuts that began in September 2024 is now over.

Shifting perceptions of the Fed explain why longer-term interest rates have risen sharply since the war with Iran began. Traders have raised where they think rates will be in the future, and even priced in a small possibility of a rate increase this year. As those expectations get reflected in bond yields, businesses and households feel the consequences immediately, such as through higher mortgage rates.

Officials sometimes push back against market pricing that is out of step with what they themselves expect to do. But because the Iran war has raised their inflation anxiety, the Fed has little reason to push back now, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. He said the market's new expectation of steady or higher rates ahead is working in the Fed's favor.

Importantly, much of the hawkish talk is coming from officials previously thought of as neutral or dovish. Governor Christopher Waller, one of the strongest advocates for cuts, said this month that the Iran war's inflation risks swayed him to support holding steady in March.

Four times a year, the Fed releases a dot plot of where all 19 policymakers expect rates to end the year. Markets typically take a strong signal from that plot, which in March showed a median of one more rate cut expected this year.

But Mary Daly, the dovish president of the San Francisco Fed, said that guidance might be misleading. It "risks conveying a false sense of certainty...making it harder for the public to clearly predict how the FOMC will react," she wrote on LinkedIn. She wrote that there is no single most likely path for interest rates.

Powell himself played down the dot plot. It is "even more than usual good to take the forecast with a grain of salt," he said in a press conference this month.

To be sure, there are still some reasons to cut. More than 90,000 jobs were lost in February and unemployment rose to 4.4%. Many economists think that if Middle East tensions ease, oil prices will fall back from current levels, and with time inflation will resume falling toward the Fed's 2% target.

If oil prices go significantly higher, that could pummel spending and employment, prompting the Fed to cut rates to prevent a recession.

"We didn't start the year with a whole lot of strength," said Natixis's chief U.S. economist, Christopher Hodge, who believes further rate cuts are still likely this year.

But several factors have combined to raise the bar for any further Fed cut.

Since September 2024, the Fed's interest-rate target has dropped by almost 2 percentage points to a range of 3.5% to 3.75%, and further cuts would bring it even closer to a neutral level that would no longer be leaning against rising prices.

Economists can only guess where exactly neutral is, but a growing contingent of Fed officials say they may have hit it. Philip Jefferson, the Fed's vice chair, said Thursday the Fed's recent cuts "put the rate broadly in the range of neutral." Richmond Fed President Thomas Barkin said Friday that cuts have left "the fed-funds rate at the higher end of the range of neutral." If rates are indeed at neutral, cutting them further would effectively mean feeding inflation.

Officials are also conscious that inflation has overshot the Fed's 2% target for six straight years this month and worry the public will come to expect high inflation for the long term. Such expectations can be self-fulfilling. In that case, simply waiting out a tariff shock or an oil spike wouldn't be sufficient to return inflation to 2%. Using the Fed's preferred gauge, inflation is now around 3%.

The Iran war accentuates that risk by raising prices for gasoline and food, which people buy frequently. Fed officials "really don't want to see inflation expectations rise," said Derek Tang, an analyst at Monetary Policy Analytics. "The problem is, they don't know how close to the edge they are."

Still, the Fed can take some comfort that there is no evidence yet that expectations have ratcheted higher. On Friday, the University of Michigan's March consumer survey showed that while short-term inflation expectations have ticked up, longer-term expectations remain moderate.

Write to Matt Grossman at matt.grossman@wsj.com

(END) Dow Jones Newswires

March 29, 2026 05:30 ET (09:30 GMT)

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