The cacophony of Federal Reserve officials with hawkish outlooks on short-term interest rates is growing louder as war-fueled inflation risks outweigh concerns about the U.S. labor market.
Boston Fed President Susan Collins told Bloomberg May 7 that she agreed with three fellow regional bank presidents who dissented at the April 29 monetary policy meeting over wording that suggested the central bank would eventually resume cutting the benchmark Federal Funds Rate this year.
Collins, who is not a voting member of the Federal Open Market Committee in 2026, said she was “strongly supportive” of the decision to leave rates unchanged at 3.5% to 3.75%.
But she also said she preferred to adjust the text of the post-meeting statement to “not be as closely aligned with language that has been associated with the presumption that the next move will be a cut.”
Historic Fed vote reflects 8-4 divide
It was the Fed’s third pause after cutting rates by 75 basis points during its last three meetings of 2025 due to a weakening labor market — and the first time in more than 30 years the FOMC vote reflected four dissents.
“The center is moving toward a more neutral place,” outgoing Fed Chair Jerome Powelltold the post-meeting press conference, describing the U.S. economy as “resilient” in spite of the recent price shocks from the Ukraine and Iran wars, the pandemic and President Donald Trump’s tariffs.
A neutral state is when an economy operates at sustainable growth with stable inflation and full employment without overheating or recessionary pressure.
It can also mean interest rates move in either direction.
“People are not saying that we need to hike now,’’ Powell said.
Fed rate outlook divides officials
The FOMC statement said that “developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.”
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks,’’ the statement said.
Fed Governor Stephen I. Miran voted against the rate pause, preferring to lower the target range for the funds rate by 25 basis points.
Miran, the most dovish of seven-member Board of Governors, will be replaced by incoming Fed Chair Kevin Warshlater this month.
Warsh is expected to be approved by the Senate the week of May 11. He assumes the role at a critical time for the central bank which faces not only interest-rate concerns from the Middle East conflict but worries that Fed independence will be politicized by the White House.
Fed language signals resumption of rate cuts
Judging from the language in its official post-meeting statement, the FOMC appears to signal it could resume cutting benchmark interest rates which guide short-term borrowing from credit cards to business loans, and even indirectly, mortgage rates in the stagnant U.S. housing market.
The primary point of contention: the two magic words “additional adjustments” which in Fed-speak meant a signaling of resumption of rate cuts.
Regional Fed Presidents Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas all dissented from the April 29 FOMC decision.
They released independent statements May 1 saying the Fed should be more explicit that the next monetary-policy step may not be a rate cut but rather a rate hike as inflation risks rise due to the energy shocks of the Iran War.
Collins said that interest rates are likely to remain on hold “for a longer time period, with further easing further down the road.”
Related: Fed drops rate-cut bombshell
“It’s more the persistence of inflation that I’m focused on,” Collins said, adding that supply-chain disruptions could cause price increases to spread beyond energy to food as global spillovers from the war continue.
But the Fed might also have to consider an increase under certain circumstances, she added.
“I do think that there are scenarios in which it would be important to strongly consider a hike,” Collins said, though she emphasized that’s not her baseline expectation.
Fed rate outlook divides officials
The FOMC statement said that “developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.”
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook and the balance of risks,’’ the statement said.
Fed Governor Stephen I. Miran voted against the rate pause, preferring to lower the target range for the funds rate by 25 basis points.
Miran, the most dovish of seven-member Board of Governors, will be replaced by incoming Fed Chair Kevin Warsh later this spring.
Warsh is expected to be approved by the Senate the week of May 11. He assumes the role at a critical time for the central bank which faces not only interest-rate concerns from the Middle East conflict but worries that Fed independence will be politicized by the White House.
President Donald Trump has been demanding the Fed slash rates to 1% or less. He also said he would only nominate a Fed Chair candidate who agreed with his monetary-policy stance.
Warsh, a former Fed governor, has criticized the central bank on several fronts including interest rates and pledged a “regime change” under his leadership although he has not been clear on exactly how that change will be implemented.
Latest inflation figures show increase in energy prices
The Bureau of Economic Analysis released the March 2026 Personal Consumption Expenditures — the Fed’s preferred inflation gauge — on April 30 showing an acceleration in headline inflation largely driven by energy costs.
- Headline PCE (Year-over-Year): 3.5% up from 2.8% in February.
- Core PCE (Year-over-Year): 3.2% (excluding food and energy) up from 2.9% in February.
Economists at Nationwide, a financial firm, expect the inflation rate to peak sometime this summer at around 4.5%, more than double the Federal Reserve’s 2% target, The New York Times reported.
The April employment report due May 8 is expected to show a slowdown in payroll growth, while the unemployment rate likely was unchanged at 4.3%, based on economists’ forecasts.
Collins focuses on inflation risk
The labor market has shown signs of an “unusual balance” with low unemployment but low rates of hiring, Collins said. Still, she noted, demand remained resilient amid strong consumer spending.
But inflation remains Collins’ main focus.
“One of the reasons I’m very concerned about inflation is recognizing the impact it has on people’s lives,” she said. “Price levels are very high.”
Soaring gas prices have put the brakes on the spending habits of millions of Americans, hitting their wallets hard and fueling America’s persistent economic inflation-driven K-shaped divide, according to a new study by Federal Reserve economists.
The study by the New York Fed looked at gas consumption during March 2026, the first full month of the war.
The energy price shock from the Iran War has caused what the study of March gas consumption shows is the highest gap to date in U.S. gas spending, severely curbing the purchasing power of lower-income households at the pump.
And that gap is expected to grow with higher inflation spikes as the supply chain continues to be restrained in the dispute over the Strait of Hormuth.
Taming high inflation would allow the Fed to deliver a more vibrant economy that works for all, just as the labor market shows signs of stabilization, Collins said.
Fed’s dual mandate requires a tricky balance
The Fed’s dual mandate from Congress requires maximum employment and stable prices.
- Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
- Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.
Traders are currently pricing in the next interest-rate cut for mid-to-late 2027, according to the CME FedWatch Tool.
And as I reported, bond traders are rapidly reshaping their outlook on U.S. monetary policy, increasing bets that the Fed could raise interest rates before cutting them as persistent inflation risks and geopolitical tensions upend dovish expectations.
The Kalshi prediction market estimates a 44% chance of a Fed rate hike before July 2027.
The next FOMC meeting is June 16-17.
Related: Fed paints worrisome economic picture as inflation spikes
