The Federal Reserve's internal doves are collectively adopting a more hawkish posture, creating a difficult debut for new Chair Kevin Warsh, who was appointed by former President Trump to cut rates but now faces a committee discussing potential hikes.

A recent in-depth report from a veteran journalist, published just before Chair Kevin Warsh's first policy meeting, highlights this awkward timing. Warsh, who publicly advocated for rate cuts last year and secured his position partly due to that stance, now leads a Fed where the policy debate has quietly shifted from "when to cut" to "whether to hike."

This reversal did not happen overnight. U.S. inflation has risen this year, surpassing 3%, while the labor market has regained strength. Supply bottlenecks from an AI construction boom and oil price increases driven by conflict in Iran continue to add fuel to price pressures. The justifications that previously supported expectations for rate cuts have been disappearing one by one.

Warsh now faces a committee he did not assemble, a set of forecasting tools he has long criticized, and a potential policy direction that runs counter to the wishes of the president who appointed him. His first meeting in charge is poised to be challenging.

How the Doves Became Hawks

The most telling shift is in the stance of Governor Christopher Waller. Throughout last year, Waller was concerned about a weakening labor market and, as recently as January, voted for a rate cut against the majority of his colleagues. However, last month he publicly stated that recent data had "pushed me in another direction." He explicitly supported removing the "easing bias" from policy statements and said he "can no longer rule out the possibility of a rate increase at some point in the future."

Regarding market discussions of a potential September rate cut, Waller's response was blunt: "As a serious central banker, you cannot seriously talk about that."

The Center Begins to Shift

If Waller represents the doves' turn, then the change in Governor Lisa Cook's position indicates that even the center is becoming less firm. Cook is not a hawk; she stated last month that holding rates steady was the right choice and that the baseline scenario was still for inflation to come down on its own. However, she added a condition that would have been nearly unthinkable for her a year ago: she said she "would be prepared to increase" rates if the expected decline in inflation "failed to materialize in a timely manner."

The underlying concern is that five years of persistently above-target inflation may have started to influence how businesses and workers set prices and negotiate wages, creating self-reinforcing expectations.

Hawks Have Been Waiting for This

The hawks on the committee have been dissatisfied for some time. When the Fed cut rates late last year, Cleveland Fed President Beth Hammack, Dallas Fed President Lorie Logan, and Minneapolis Fed President Neel Kashkari dissented, arguing the case for easing was weak to begin with.

In April, the trio joined forces again, this time objecting not to the rate decision itself but to the statement language suggesting the "next move is more likely to be a cut." They pushed for its removal to signal that a rate hike was equally possible.

Now, the data is further tilting in their favor. Hammack stated this month that holding steady was appropriate for now, "but if recent trends persist, action may be warranted soon." Logan went further: "I am increasingly concerned that it may be necessary to raise rates later this year."

The hawks have also raised a noteworthy argument: as inflation rises, the inflation-adjusted "real rate" is actually falling, meaning Fed policy may be less restrictive to the economy than the nominal rate suggests. In other words, simply holding rates steady could, in a sense, be considered a form of easing.

Warsh's Dilemma

The Fed is widely expected to hold its benchmark rate steady at 3.5% to 3.75% this Wednesday. However, the real focus will be on two key areas.

The first is the statement wording. The "easing bias" language—hinting the next move was more likely a cut—maintained for months is expected to be removed, signaling that cuts and hikes are now seen as equally probable.

The second is the quarterly "dot plot" of rate projections. Back in March, over a dozen officials still forecast at least one rate cut this year. This time, most officials are expected to show rates holding steady for the year, with some potentially penciling in a hike.

Warsh himself has long criticized the Fed's over-reliance on "forward guidance," including tools like the dot plot. He could choose not to submit his own projection or strip related hints from the official statement. However, as noted in the report, such operational distinctions matter little to investors, who will read the substantive message. The one who might care about such distinctions is the president who hoped for lower rates.

A comment last month from Chicago Fed President Austan Goolsbee perhaps best captures the current situation: "We now face the prospect of a fairly serious inflation problem developing, with the job market basically stable."

The result is that there are almost no voices left on the committee arguing for rate cuts. Warsh's debut meeting is likely to signal that the Fed's next policy move could be a hike. And this message will be delivered using the tools he has long criticized, by a committee he did not choose, pointing toward a direction his appointor did not want to see.