MW Higher inflation is on the way. The Fed needs to make this clearer before it raises rates.
By Fabio Natalucci and Craig Torres
Fed's communication should help investors manage risk - including the possibility that rates may rise
Jerome Powell is the outgoing Fed chair, which limits his ability to comment publicly about the economy.
Investors anticipate the path of rate policy to remain essentially flat over the next year, despite rising risks to the inflation outlook.
The Federal Open Market Committee needs to update its communication with a world that is about to see higher inflation.
Annual price increases have been above the Fed's 2% target for five years, and the Iran war oil shock is adding to structural changes and supply constraints across the U.S. economy.
Labor supply is less abundant, due to global demographics trends and America's immigration crackdown. Global trade integration had produced disinflationary forces for the past two decades. Now it is fractured and disrupted. The artificial-intelligence boom's forecasted energy needs exceed supply, according to most estimates, unless there is a simultaneous investment boom in power generation. And the time horizon for the hoped-for boost in economic productivity that would lessen price pressures is highly uncertain.
Perceived easing bias
Communications from Fed officials since the last policy meeting in March have focused on high uncertainty in the outlook and a reiteration that the policy rate, now in a range of 3.5% to 3.75%, is well-positioned to balance the dual mandate of maximum employment and price stability.
Investors appear to have read recent FOMC communication as maintaining a dovish easing bias. What's more, the March statement kept the "in considering the extent and timing of additional adjustments" phrasing - first put in place during the 2024 easing cycle.
With those signals, investors anticipate the path of rate policy to remain essentially flat over the next year, despite rising risks to the inflation outlook. It is therefore little wonder that stock indices have brushed against record highs, and overall financial conditions have continued to ease. What's more, the economy is enjoying a fiscal and deregulatory tailwind. The unemployment rate held at 4.4% in March, about where it was over the previous seven consecutive months, and consumption data, such as retail sales for March, has been strong.
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Higher U.S. inflation is on the way. Second-round effects in energy-linked products such as fertilizer are already visible.
The subtle easing bias in Fed communication perceived by investors needs to be updated for risk-management purposes toward a more symmetric policy outlook - including the possibility that rates may have to be raised. Indeed, the March FOMC-meeting minutes noted that "some participants judged that there was a strong case for a two-sided description of the committee's future interest-rate decisions in the post-meeting statement."
Here are some ways the committee could achieve this objective:
1. Speeches: One possibility is for Chair Jerome Powell and other Fed members to adopt more symmetry when they talk about the rate outlook. Cleveland Fed President Beth Hammack has done this: "My baseline is that we're going to remain on hold for a good while, but I do think that there's two-sided risk to rates," Hammack said in an interview with CNBC earlier this month. "I think there's risk that we might need to be more accommodative or more restrictive, depending on how the data comes out."
2. Scenario discussion in the minutes: The FOMC could use the minutes of its next meeting to elaborate on possible scenarios discussed by FOMC participants and implications for interest rates, thus providing a more two-sided assessment of the risks around the future path of policy.
3. Scenario discussion at the press conference: Minutes are published with a delay, so they can be perceived as stale. A timelier alternative would be for the chair to lay out scenarios representative of the full range of views of the FOMC during its press conference, and what those scenarios mean for the policy rate.
4. Update the statement: A change of the statement would likely be the most effective way to adjust the perceived tilt of policy because it would have to be formally ratified by a majority of the FOMC. But how to achieve this without meaningfully rewriting the statement?
One easy fix, says Ellen Meade, a former senior adviser for communications to the FOMC and now a professor at Duke University, is to remove the word "additional" from the statement to read: "in considering the extent and timing of adjustments to the target range."
"I think they are going to pull 'additional' out," Meade said, describing it as a low-cost, effective signal to the markets.
As a compliment to that, the committee could change the description of the uncertainty and inflation outlook in the statement from "uncertainty about the economic outlook remains elevated," and "the committee is attentive to the risks to both sides of its dual mandate," to language emphasizing greater weight to upside risks to inflation.
Higher U.S. inflation is on the way. Second-round effects in energy-linked products such as fertilizer are already visible. Investors need stronger signals from the Fed to start aligning markets with the full range of probable outcomes for the policy path. Maintaining the existing communication risks suppressing interest rates when inflation starts to rise and more volatile outcomes for financial markets if more aggressive corrective signaling is needed.
Fabio Natalucci is CEO of the Andersen Institute for Finance and Economics. Craig Torres is editor-in-chief.
More: Jerome Powell's final Fed press conference marks an end to an era
Also read: U.S. inflation picture is the worst in almost 4 years
-Fabio Natalucci -Craig Torres
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April 27, 2026 15:11 ET (19:11 GMT)
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