Key Takeaways:
Fed Governor Lisa Cook said she is prepared to raise interest rates if inflation does not ease, pushing back against expectations that the central bank's next move will be a cut.
Federal Reserve Governor Lisa Cook said Wednesday she is prepared to raise interest rates if disinflation fails to materialize, a hawkish stance that challenges expectations for lower borrowing costs under new Chair Kevin Warsh.
"The risks remain tilted toward higher inflation," Cook said at a policy forum on artificial intelligence at Stanford's Institute for Economic Policy Research. "I am prepared to raise rates, if the expected disinflation does not appear in a timely manner."
The fed funds rate stands at 3.50% to 3.75% after the April 29 FOMC meeting, where the 8-4 vote marked the most dissents in more than three decades. The April CPI accelerated to 3.8% — the fastest pace since May 2023 — while the PPI rose 6%, with its energy component surging 22.7% as oil prices topped $100 a barrel following the Feb. 28 start of the Iran war.
Cook's comments pose a direct challenge to Warsh, whom President Donald Trump appointed with the expectation he would lower rates once the Iran conflict ends and energy prices ease. The CME FedWatch Tool prices a near 100% probability of a hold at the June 16-17 meeting, though futures markets now show a 57% chance of a hike by January 2027.
Cook cited three forces pushing prices higher: last year's tariffs, oil prices that have surged since the Iran war began, and a jump in demand for chips, software and construction workers as AI data center investment accelerates. While she expects inflation to decline in coming months without rate increases, she said five years of inflation above the Fed's 2% target risks becoming embedded in price- and wage-setting behavior.
The April FOMC minutes, released May 20, revealed an even more hawkish shift than the vote tally suggested. "A majority of participants" highlighted that some policy firming would likely become appropriate if inflation continued to run persistently above 2%, the minutes showed. "Many participants" indicated they would have preferred removing language from the post-meeting statement that suggested an easing bias.
Warsh took the helm May 22, the same day the Dow closed at a record high, but bond yields have since rattled higher on inflation concerns. The new chair has long been critical of the central bank's communications strategy and has called for lower rates and a smaller balance sheet. He told critics he had not discussed interest rates with Trump during the interview process.
But Cook — whom Trump attempted to remove last year in a case now before the Supreme Court — represents a bloc of Fed officials who see rate hikes as a live option. Fed Governor Christopher Waller said May 22 he "can no longer rule out rate hikes further down the road." John Briggs, head of U.S. rates strategy at Natixis, told Morningstar that if the Fed raises rates because of inflation worries, "it's not going to do it once. It's going to do it two or three times."
The last time the Fed embarked on a hiking cycle in 2022-2023, the S&P 500 entered a bear market, falling more than 20% from peak to trough. While the magnitude of any future tightening would likely be smaller given rates are already elevated, a sustained decline in oil prices may be needed before investors regain confidence, analysts said.
Cook said she believes the labor market will remain stable without rate cuts, though she would be prepared to lower rates if the job market deteriorates. The unemployment rate stood at 4.3% in April.
This article is for informational purposes only and does not constitute investment advice.
