Rate Cut Expectations Recede, Fed Officials Collectively Turn Hawkish, What Signals Are Being Released Behind This?

TradingKey - As the disinflation process slows and oil prices continue to rise, dovish officials within the Federal Reserve are gradually releasing hawkish signals. Rate cuts are no longer a certainty for the next step, and the possibility of rate hikes is gradually emerging in the market. For the market, this means that previous unilateral bets on an easing cycle are no longer viable.

Recently, the shift in the Fed's tone has become quite evident. While discussions previously centered on when to continue cutting rates, an increasing number of officials are now asking whether further cuts are even necessary.

Latest reports from Reuters and The Wall Street Journal indicate that with inflation still above target and oil prices climbing due to recurring tensions in the Middle East, the internal stance of the Fed is becoming more cautious.

The market is now more inclined to accept the assessment that the room for rate cuts this year may already be very limited, although a rate hike is not yet the base-case scenario.

Rate cut expectations recede as the market begins to reprice

On March 18, the Federal Reserve kept interest rates unchanged at 3.50%-3.75%, and the signals released after the meeting were not particularly dovish.

Official statements continue to emphasize that inflation remains "elevated," and both the dot plot and official remarks convey a single message—rate cuts are no longer a foregone conclusion for the next step.

Reuters noted that traders had originally bet on at least two rate cuts this year, but following the latest rhetoric, such expectations have cooled significantly.

This is also why the bond market, gold ( XAUUSD) and high-valuation assets have all been struggling recently. For the market, the real pain is not that the Fed will hike rates immediately, but rather that maintaining high interest rates is becoming the new default state.

Why are even dovish officials starting to release hawkish signals?

The most noteworthy aspect of this shift is that some officials who were previously more dovish are now beginning to tighten their rhetoric.

The latest developments from the Fed show that officials including Governors Lisa Cook and Christopher Waller, as well as San Francisco Fed President Mary Daly, have all adopted more cautious stances recently.

The Wall Street Journal even explicitly noted that those who are usually more willing to emphasize the scope for easing are also hinting that the rate-cut cycle may be nearing its end.

The main reason can essentially be attributed to: rising oil prices amid Middle East disruptions and a pace of disinflation that is not fast enough. Naturally, the Fed prefers to observe first rather than push forward with policy. For the Fed, the risk of cutting rates too early has begun to outweigh the risk of holding steady.

The internal concern at the Fed now is not whether high rates will drag down growth, but whether continuing to cut rates too soon will reignite inflation.

In such an environment, dovish officials will naturally shift toward more conservative rhetoric, as they are facing not an economy that can be safely eased, but one that remains unsettled by oil prices, tariffs, and inflation expectations.

Why is the probability of a rate hike low?

It should be noted that the end of rate cuts does not mean the Fed will hike rates immediately.

While some within the Fed have discussed including rate hikes as an option in their communication framework, they also emphasize that such a possibility exists but is not high. What the Fed wants to do now is not prepare for "retightening," but rather to hold "further easing" at bay.

If the Fed were to hike rates precipitously, it would have to face two issues: first, whether the economy truly needs tighter policy; and second, whether the market has fully priced in the resurgence of inflation. Based on currently disclosed information, neither condition is sufficiently met.

A more realistic scenario is the Fed maintaining interest rates in the current range for now, continuing to monitor oil prices, inflation, and employment data, making "higher for longer" the new default state.

What the market truly faces is "higher for longer" interest rates

From a trading perspective, the core of this shift in the Fed's rhetoric is not a sudden hawkish turn by an official, but the entire policy framework starting to switch from a "rate-cut cycle" to "staying on hold for longer."

A recent Reuters survey of economists also showed that nearly three-quarters of respondents expect the Fed to continue holding rates steady next quarter rather than immediately initiating new cuts; while a rate hike is considered highly unlikely, it is no longer a completely taboo subject.

This means that the most significant market shift ahead may not be a surprise from a specific meeting, but a repricing by investors of "how long high rates will persist." As long as this assessment remains unchanged, the volatility in gold, bond markets, and growth stocks will be difficult to truly settle down.

This is also why gold, tech stocks, and high-leverage assets have recently underperformed. It is not because the possibility of a Fed rate hike is emerging, but because the supporting logic for continued rate cuts has been removed.