Fed Spokesperson Warns: Five Consecutive Years of Inflation Embarrassment for the Fed, Middle East Conflict Wipes Out Rate Cut Expectations

The Federal Reserve faces its fifth consecutive year of unexpected inflation shocks, this time disrupted by Middle Eastern conflicts that threaten the global energy supply chain. Core PCE has rebounded from last year’s lows to 3.1%. The Wall Street Journal notes that the main focus of this week’s meeting has shifted from “when to cut rates” to “whether to continue hinting at rate cuts,” with three market signals warranting close attention. This article is based on Nick Timiraos’s piece, “The Fed Keeps Getting Hit With New Shocks in Its Yearslong Inflation Fight,” translated and compiled by Dongqu.

(Background: 2026 Federal Reserve Transition: End of Powell Era, US Interest Rates Likely to Be Slashed to the Bottom)

(Additional context: Is Iran’s blockade of the Hormuz Strait just a show? Experts say Tehran will bleed first; analysis of market impact and economic chain reactions)

Table of Contents

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• The question shifts from “When to cut rates” to “Whether to cut rates at all”
• Five years of credit depletion, “Tactical 2.0” no one dares to mention anymore
• Dot plot changes face: rate cut expectations significantly revised
• Replaying 1990? Historical analogy hints at recession risks

This scene is playing out again. For the fifth straight year, Fed officials find themselves in the same awkward position: originally expecting inflation to fall back to the 2% target, but then facing a new external shock that disrupts this rhythm. First, the aftershocks of the pandemic, then the Russia-Ukraine war, last year’s large-scale tariffs; now, the outbreak of Middle Eastern conflict, with the Strait of Hormuz—one of the world’s most critical energy transit routes—once again shrouded in uncertainty.

Even before the recent escalation in Middle Eastern tensions, the latest data already showed signs of stagnating inflation decline. If the conflict further drives up energy and commodity prices, the Fed’s timeline to meet its goals could be pushed back again.

The question shifts from “When to cut rates” to “Whether to cut rates at all”

This week’s meeting presents a core issue that was almost unimaginable just a few months ago: the focus is no longer on the timing of the next rate cut, but on whether the Fed can convincingly tell the market “rate cuts are still on the table.”

The Middle Eastern conflict is likely to reinforce the internal consensus to hold steady. But a more challenging issue is how officials communicate their policy outlook for the coming months. There are three key market observations:

First, the language of policy statements. At the January meeting, a few officials attempted to remove language hinting at “the next step being a rate cut,” but failed. If this attempt succeeds this time, it will be the Fed’s first explicit acknowledgment that this easing cycle may be over.

Second, the quarterly economic projections (SEP). The 19 participating officials each submit forecasts for inflation and interest rates, which together form the widely watched “dot plot.”

Third, the post-meeting press conference. Fed Chair Powell’s wording can amplify or soften the market impact of these signals.

Five years of credit depletion, “Tactical 2.0” no one dares to mention anymore

In response to oil price shocks, the textbook advice for central banks is “look through it,” treating it as a temporary phenomenon and not overreacting. But this advice presupposes that the public still believes inflation will eventually fall back. After five consecutive years of inflation above target, that trust is no longer a given.

Neel Kashkari, President of the Minneapolis Fed, told the Wall Street Journal, “Are we really going to do another ‘Transient 2.0’?” He included a rate cut in his forecast for this year in the December dot plot. Former Boston Fed President Eric Rosengren described the multiple shocks—tariffs, soaring oil prices, tightening immigration policies reducing labor supply—as making it “extremely difficult” for the Fed to take clear action.

UBS Chief US Economist Jonathan Pingle notes that officials already more concerned about inflation are likely even more worried now; those more focused on the labor market should be more tense rather than relaxed given these shocks.

Dot plot changes face: rate cut expectations significantly revised

In December, 12 of the 19 officials projected at least one rate cut this year. If three of them change their stance, the median forecast drops to zero cuts. The market’s repricing has been significant: before the Middle Eastern conflict escalated, traders priced in a 74% chance of at least one rate cut by year-end; now, it’s down to 47%. The probability of rate hikes before year-end has risen from 8% to 35%.

Jim Bullard, President of the St. Louis Fed, said in an interview that he would withdraw his previous forecast of a rate cut, stating, “We should no longer commit to a rate cut.” Rosengren also believes that the current committee’s signals—“the next step being a rate cut”—are becoming increasingly hard to justify.

However, there are voices on the other side. Up to three Fed officials may lean toward supporting rate cuts. Last year, the US added only an average of 10,000 jobs per month, compared to 377,000 in 2022—a stark contrast. Consumer debt delinquency rates continue to rise, and savings among the bottom 80% of households have significantly shrunk.

Replaying 1990? Historical analogy hints at recession risks

Pingle believes the current situation closely resembles 1990—the Gulf War’s oil price shock ultimately pushed the US into recession. Back then, the Fed faced a dilemma between “unfinished inflation fight” and “clear economic slowdown.”

Vincent Reinhart, a former senior Fed advisor and now Chief Economist at BNY Mellon, describes the broader picture: “The Fed’s policy inclination remains toward easing, which is the general direction. But they won’t prematurely cut rates before confirming that inflation is firmly declining.”

There’s also a time pressure: Powell’s term as Chair ends this May, and this week’s dot plot will serve as the policy baseline for his successor.