New Survey Finds Former Federal Reserve Insiders Saying Rate Hike Could Be Needed

A small majority of former Federal Reserve officials believes the U.S. central bank could need to raise short-term interest rates modestly this year to contain inflation, according to a survey of former officials and staff conducted ahead of the Fed’s policy meeting this week. 

Seventeen of 32 former officials who offered interest rate projections said an increase would likely be appropriate in 2026, while 14 officials said no increase would be appropriate. Only one person said the best course would be for the central bank to cut short-term interest rates, which the Fed has been signaling as its most likely course for several months. 

The inflation outlook poses a potential challenge for the Fed’s new chairman, Kevin Warsh, who leads his first meeting when officials meet June 16 and 17. The survey panel foresaw little progress reducing inflation in the months ahead. Elevated inflation has been compounded by higher energy prices associated with conflict in the Persian Gulf, though a U.S.-Iran agreement to open the Strait of Hormuz could help. 

The survey panel’s median estimate of inflation by year-end – as measured by Commerce Department’s personal consumption expenditure price index – was 3.5%. That’s well above the Fed’s 2% objective and near the 3.8% increase registered in April from a year earlier. Economic growth was expected to continue at a healthy rate above 2% while unemployment was projected to remain near the May level of 4.3% through the end of the year, modestly better than Fed officials expected a few months ago. 

In all, 34 former officials and staff members participated in the survey between June 5 and June 12, before the Hormuz agreement. Participants included six former Fed board governors, six former regional bank presidents, 22 former staff at the board and banks. Some former officials didn't answer every question. 

The survey is conducted by Jon Hilsenrath, a former Wall Street Journal economics writer and Visiting Scholar at Duke, in partnership with the Duke University Department of Economics. Surveys are conducted ahead of the Fed’s quarterly update of its own economic and interest projections, which it calls the “Summary of Economic Projections.” Former officials are granted anonymity in this survey to encourage participation and frank commentary.

“The real economy--especially the labor market--has proven unexpectedly resilient to the many domestic and global shocks of recent months,” one participant said. “Meanwhile, the inflation data continues to come in on the high side, and it's not just energy prices. Both core and headline inflation have risen about 3 percent over the past 12 months. This shift should push them towards a bias towards tightening. That could change over the summer, as there are a number of factors that could cause the real economy to weaken substantially. But that has yet to happen.”

The Fed’s Summary of Economic Projections provides its estimates of inflation, unemployment, and economic output, in addition to estimates of interest rates that officials expect to be appropriate over a three-year horizon. The interest rate estimates, also known as the “dot plot,” are closely watched on Wall Street for insight into the central bank’s thinking and plans. 

Former officials and staff saw the Fed starting a process of change in its communication strategies with this meeting under new chairman, Kevin Warsh, who has said the central bank offers too much “forward guidance” on the outlook for interest rates. In past Fed policy statements, the central bank has indicated whether it expects its next move in interest rates to be up or down, or whether it isn’t leaning in either direction, meaning its stance is neutral. 

Twenty-two former officials surveyed said they expected the Fed to remove this forward-looking guidance from its June policy statement, leaving the public without an indication of which way it leans. 

“Warsh has said that he wants to provide less guidance, and I think the Committee will be okay with that in the current situation,” one person said. “It will get more interesting when the Committee is leaning in a direction, and they have to decide if they show that somehow.”

Former officials saw a range of other possible shifts in the Fed’s approach to communication at the meeting. Several former officials said they did not expect Chairman Warsh to submit an interest rate projection for the Fed’s “dot plot;” a number said other officials might follow Warsh’s lead and refrain from submitting interest rate projections themselves. Many people expect the new chairman to eventually eliminate rate projections from Fed communication. 

“The dots are gone by January,” one person said. 

Some officials said they expect the new chairman to pare back the central bank’s policy statement released after the meeting, while others said they expect Warsh to pare back the statement read by the chairman at the post-meeting press conference. Some said they also expected minutes of the Fed meeting, released three weeks after the meeting, to become sparser and more cryptic. 

The net effect will likely be diluted guidance from the Fed on the outlook for rates and less commentary on the economy, though few expect the new chairman to announce a full communication revamp at the meeting. Rather, it is something that will unfold in the months ahead. 

“I think Warsh should take his time to try and build consensus around any changes,” one survey participant said. 

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