Ahead of the Federal Reserve's April FOMC meeting, prominent financial journalist Nick Timiraos, often referred to as the "Fed Whisperer," published an analysis noting:
Two years ago, amid stable economic performance and steadily declining inflation, Fed Chair Jerome Powell humorously dismissed concerns about "stagflation" by saying, "To be honest, I don’t see the 'stag' or the 'flation'." Today, an energy shock triggered by real-world conflict has brought that risk back to the forefront—at a time when U.S. inflation has never truly returned to the Fed's 2% target. The historical specter of 1970s-style stagflation no longer seems as distant as it did then.
Stagflation refers to the combination of stagnant economic growth and high inflation. Last year, this topic resurfaced as tariff threats pushed up prices and restrained employment, though it remained largely theoretical, with policymakers able to adjust course if needed.
Timiraos notes that it is almost certain Fed officials will leave the benchmark interest rate unchanged in the 3.5% to 3.75% range at the conclusion of their two-day meeting this Wednesday. However, this meeting—the last before Powell's term expires—marks a critical point in a deeper debate: how long can the committee maintain its stance that the next policy move is more likely to be a rate cut than a hike?
Fed officials are closely watching how the U.S. economy absorbs its fourth supply shock in five years: post-pandemic reopening, the Russia-Ukraine conflict, tariff disputes, and conflict involving Iran. While each shock could be viewed as a one-off event not requiring a policy response, their cumulative effect has put policymakers on edge. Tariffs are already testing the limits of how much price increases businesses and consumers can tolerate.
Timiraos writes that Fed officials are also grappling with another question: does weak job growth overstate the fragility of the labor market? If slower immigration means the economy no longer needs to add as many jobs as before, then a slowdown in employment gains may not signal an impending recession.
Fed Governor Christopher Waller, who previously supported three rate cuts last year due to concerns about the labor market, has now shifted his focus to inflation risks. He cites the 1970s experience, when officials repeatedly dismissed shocks as "transitory," allowing inflation expectations to become unanchored. Waller stated:
We must remain vigilant against this series of sporadic shocks. Expectations matter. At some point, you may have no choice but to respond.
We keep saying our target is 2%, but five years on, inflation has never truly returned to that level. When will people start to question your commitment?
Although a ceasefire has been announced in the Iran conflict, the Strait of Hormuz remains effectively blocked. Jet fuel prices have surged. Fed officials now expect the process of returning inflation to the 2% target to stall for another full year.
Some Fed officials had previously discussed resuming rate cuts this year to offset the automatic tightening effect of holding rates steady while inflation falls. That view has faded. New York Fed President John Williams said earlier this month:
Given current conditions, that scenario simply doesn’t exist. If anything, inflation is moving upward.
Williams characterized the Fed’s current stance as an active choice rather than passive adherence: Our monetary policy is clearly in the right place—exactly where we want it to be.
Timiraos points out that compared to the 1970s, the U.S. economy has undergone profound changes, making a full repeat of that era unlikely. Moreover, today’s Fed places far greater emphasis on managing inflation expectations.
For FOMC members, Timiraos suggests, the bigger question is whether to revise the formal policy statement to signal that rate cuts are largely off the table. History shows that such language changes can sometimes be as impactful as actual rate decisions.
Since late last year, the Fed’s statement has included a nine-word phrase suggesting the next policy move is more likely to be a cut than a hike. At recent meetings, a minority of officials have advocated removing this wording—a deletion that would signal equal probability of cuts and hikes.
Proponents of removal argue that with inflation moving in the wrong direction, supply shocks piling up, and the timeline for a return to 2% growing more uncertain—along with a still-robust labor market and stock prices at record highs—it no longer fits for the committee to signal that cuts are imminent.
However, the prevailing view within the committee is that such a change would be too drastic. Officially altering the wording would tighten financial conditions, constituting a hawkish move officials may not yet be ready to make. Powell ally John Williams said, "This is not the time to provide strong forward guidance, and indeed we are not doing so."
Fed officials will revisit the issue this week.
Timiraos notes that the FOMC’s thinking sometimes moves faster than its language. Before resorting to the "heavy hammer" of formal statement changes, officials have other, more indirect ways to signal policy shifts—whether through Powell’s press conference on Wednesday, speeches by officials in May, or updated economic projections at the mid-June meeting.
Timiraos concludes that by then, the Fed’s leadership may have shifted to Kevin Warsh—a former Fed governor nominated by Trump, potentially succeeding Powell. The decision of whether and how to formally adjust the Fed’s policy guidance may fall to Warsh, whose judgment on the matter could differ significantly from his predecessor’s.
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