The Federal Reserve's internal stance is undergoing a subtle yet profound transformation. Against the backdrop of the Iran war pushing up oil prices and reigniting inflationary pressures, Goolsbee, Daly, and several other officials previously considered doves have successively issued hawkish signals, suggesting that the Fed's rate-cutting cycle, which began in September 2024, may have reached its end.
Recent developments indicate that Chicago Fed President Austan Goolsbee has become one of the first officials to explicitly mention the possibility of an interest rate hike. He stated that if inflation behaves well, the Fed could return to a path of multiple rate cuts this year, but also acknowledged &#34;there are scenarios where a rate hike would be necessary.&#34; San Francisco Fed President Mary Daly, known for her dovish stance, emphasized that there is no single most likely path for interest rates.
Concurrently, another important logic supporting a hawkish stance is the growing number of officials who believe current interest rates are close to or have reached neutral levels. Federal Reserve Vice Chair Philip Jefferson stated that recent rate cuts &#34;have put rates roughly in the neutral range.&#34;
This shift in stance is directly impacting the markets. Since the outbreak of the Iran war, long-term interest rates have surged, and traders have revised future rate expectations upward, incorporating a small possibility of a rate hike this year. This change in expectations is rapidly transmitting through bond yields to the real economy, imposing higher financing costs such as mortgage rates on businesses and households.
Analysts point out that although a rate hike remains a low-probability event, its mere public mention signifies a significant shift in the Federal Reserve's policy balance.
<h2>Doves Collectively Shift, Policy Signals Clearly Tighten</h2>
The notable aspect of this shift in stance is that the hawkish voices are primarily coming from officials previously considered neutral or dovish.
Federal Reserve Governor Christopher Waller was previously one of the most steadfast supporters of rate cuts, but he stated this month that the inflation risks brought by the Iran war led him to support holding steady at the March meeting.
Federal Reserve Governor Lisa Cook noted that the Iran war's impact on energy prices has made persistently high inflation the primary risk facing the Federal Reserve once again.
Recently, San Francisco Fed President Mary Daly, known for her dovish stance, wrote that the interest rate path conveyed by the Fed's March dot plot &#34;risks communicating false certainty&#34; and emphasized that there is no single most likely path for interest rates.
Federal Reserve Chair Jerome Powell himself downplayed the dot plot's predictive value at his press conference this month, saying, &#34;We should be humble about our forecasts more than ever before.&#34;
The median projection in the Fed's March dot plot still indicates one rate cut this year. However, the statements from the officials mentioned above suggest that the credibility of this forecast is declining, and market interpretations are becoming increasingly cautious.
Another important logic supporting a hawkish stance is the growing number of officials who believe current interest rates are close to or have reached neutral levels.
Since September 2024, the Federal Reserve's target interest rate has been lowered by nearly 2 percentage points and currently stands in the range of 3.5% to 3.75%.
Federal Reserve Vice Chair Philip Jefferson recently stated that recent rate cuts &#34;have put rates roughly in the neutral range.&#34; Richmond Fed President Thomas Barkin said last Friday (March 27) that rate cuts have placed &#34;the federal funds rate at the higher end of the neutral range.&#34;
If rates are indeed at neutral levels, further rate cuts would imply substantial easing stimulus. With inflation not yet back to the 2% target, this would carry the risk of fueling inflation. Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, stated:
<blockquote>
With the Iran war intensifying the Fed's inflation anxieties, the Fed has almost no reason to correct the market's hawkish pricing. The market's new expectations for stable or even rising rates are, in fact, aligning with the Fed's policy intentions.
</blockquote>
<h2>Inflation Persistently Exceeds Target for Six Years, Pressure on Expectations Management Rises</h2>
The persistence of inflation is the deep-seated reason for the Fed's tightening stance. Measured by the Fed's preferred core metric, the current inflation rate is around 3%, which has exceeded the 2% policy target for six consecutive years.
Officials worry that if the public forms long-term high inflation expectations, these expectations themselves will have a self-fulfilling effect. At that point, merely waiting for tariff shocks or oil price drops to subside will not be enough to bring inflation back to the target.
Derek Tang, an analyst at Monetary Policy Analytics, noted that Fed officials &#34;are very reluctant to see inflation expectations rise,&#34; but the problem is &#34;they don't know how close they are to the tipping point.&#34;
The Iran war has further exacerbated this risk. Rising oil and food prices directly impact consumers' daily perceptions, making it easier to boost short-term inflation expectations.
However, there is currently no evidence of a systemic rise in expectations—the University of Michigan's March consumer survey shows that while short-term inflation expectations have risen, long-term inflation expectations remain moderate.
Nevertheless, despite the increase in hawkish signals, some economists still believe that rate cuts this year are not out of the question. Weakness in the labor market provides some basis for rate cuts: non-farm payrolls decreased by over 90,000 in February, and the unemployment rate rose to 4.4%.
Christopher Hodge, Chief U.S. Economist at Natixis, stated, &#34;The economy lacked strong momentum at the beginning of this year,&#34; and he still expects further rate cuts this year.
Furthermore, if the situation in the Middle East eases, oil prices may fall from their current highs, and inflation is expected to move back toward the 2% target over time. If oil prices surge further, suppressing consumption and employment, the Fed might be forced to cut rates to prevent a recession.

Former dove Austan Goolsbee, President of the Chicago Fed, became one of the first officials to explicitly mention the possibility of an interest rate hike. Mary Daly, President of the San Francisco Fed, known for her dovish stance, emphasized that there is no single most likely path for interest rates. Federal Reserve Vice Chair Jefferson and Richmond Fed President Barkin, among others, believe current interest rates are close to neutral. Analysis suggests that the mere public mention of the possibility of a rate hike signifies a significant shift in the policy balance

- The Federal Reserve is undergoing a significant shift, moving from a dovish to a more hawkish stance as officials, including Austan Goolsbee and Mary Daly, signal the possibility of rate hikes amidst inflationary pressures fueled by the Iran conflict.  
- Increasing numbers of officials believe current rates are close to neutral, which could complicate future rate cuts as inflation remains above the desired target.  
- Market reactions have adjusted to incorporate the potential for rising rates, impacting borrowing costs for businesses and households.

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Doves Lead the Turn Towards Hawkishness, Fed Officials Hint "Rate Cuts May Be Over," But "Hike Probability Low"