The US Federal Reserve is considering extending dollar swap lines with major global central banks to strengthen financial stability amid rising geopolitical risks, according to Reuters. Officials say longer-term liquidity arrangements could provide greater certainty to markets and reinforce the Fed's role in supporting global funding systems during stress periods. The discussion, which took place during the Federal Open Market Committee's April 28-29 meeting, focused on whether the Fed should lengthen the current one-year renewal structure of its standing U.S. dollar liquidity arrangements with five major central banks, including the Bank of Japan and the European Central Bank. Several policymakers viewed longer-term arrangements as potentially beneficial for global financial stability at a time when international markets are facing renewed stress from escalating conflict involving the United States, Israel and Iran. The war has driven sharp increases in energy prices and intensified concerns over the resilience of the global financial system.
Federal Reserve Governor Chris Waller has called for the central bank to remove its easing bias from policy statements, though he stopped short of advocating for an interest rate increase at this time. Speaking at an economic forum in Frankfurt, Germany, Waller stated 'I would support removing the 'easing bias' language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.' He emphasized that 'the next move, whether it is a hike or cut, will depend on the data' and noted that 'removing the language about the extent and timing of additional adjustments would make this point clear.' Waller, who previously supported lower interest rates, expressed concern about inflation becoming more persistent and spreading across goods and services, warning that 'if expectations become unanchored, he would not hesitate to support a rate hike.'
The US Federal Reserve's monetary policy outlook has undergone a dramatic transformation as inflation pressures resurface. According to reports from The Financial Express, US CPI surged to 3.8% in April 2025, marking a three-year high and representing a significant climb from the 2.3% low recorded in April 2025. The Producer Price Index (PPI) also experienced a substantial 6% increase, the largest since 2022. Much of the uptick in inflation is attributed to the ongoing closure of the Strait of Hormuz, a vital waterway where some 20% of the world's oil and gas supplies pass through, with higher oil prices quickly filtering into gasoline, diesel, jet fuel and transportation costs. Waller noted that 'inflation will largely be determined by the length of the Iran conflict — namely, how severely supply chains are disrupted and the pass-through of input costs to final product prices.' He described the impact of these factors as 'more uncertain than the impact of tariffs.' The latest inflation reports show 'broadening of price increases', with grocery prices up 0.7%, apparel up 0.6%, and services excluding energy up 0.5%. On a 'core basis', which excludes volatile energy and food prices, Waller estimates PCE at 3.3%, the highest in two and a half years. 'None of this is good news,' Waller concluded. Waller also noted that high energy costs have not reduced consumer spending and warned that there is no sign the artificial intelligence investment boom will slow.
Recent Federal Open Market Committee (FOMC) meeting minutes from the April 28-29 meeting revealed a significant shift in Fed thinking. As reported by The Financial Express, a majority of Fed members believe rates will need to rise if inflation stays above the 2% target. The minutes highlighted how the central bank's internal debate has shifted from when to start cutting rates to whether another hike may be needed. 'A majority of officials highlighted 'a majority of officials highlighted ' the central bank's internal debate has shifted from when to start cutting rates to whether another hike may be needed. 'A majority of officials highlighted ' Waller noted that 'the Fed's inflation target miss enters its sixth year' and expressed concern about rising inflation expectations becoming unanchored. He stressed that 'the outcome will depend heavily on the length of the Iran conflict' and emphasized that 'the labor market is balanced and no longer the primary concern in determining policy direction.'
Financial markets are now pricing in a potential rate hike scenario, with the CME FedWatch tool showing nearly 50% probability of at least one quarter-point rate hike in futures markets. According to The Financial Express, 41% expect a 25 basis point rate hike in December 2026, while nearly 17% expect more than 50 basis points of rate hike. Bond markets are providing the most compelling signal, with the 10-year yield rising to 4.68%, a 16-month high, and the 30-year yield surging to 5.2%, the highest level since July 2007. These elevated yields reflect investor expectations that the Fed will need to tighten monetary policy to combat rising inflation pressures. However, as noted by Oxford Economics chief global economist Ryan Sweet, 'the bar is high' for the Fed to follow through with tightening, as that would risk hurting the economy. Waller indicated he would support removing the 'easing bias' language in the Fed's policy statement to make it clear that a rate cut is no more likely in the future than a rate increase. He would need to see 'inflation improve or a significant deterioration' in the job market to support cutting rates.
As the Federal Reserve prepares for a new leadership transition, incoming chair Kevin Warsh faces pressure to adopt a more hawkish policy stance at the June 16-17 meeting. According to The Washington Examiner, Trump will hold a swearing-in ceremony at the White House for Warsh on Friday, the first to take place at the White House since 1987 and first to be attended by a president since 2006. Trump has been explicit in his expectation for the Fed to cut rates but appeared to back off his demands as Warsh's swearing-in nears, telling the Washington Examiner 'I'm going to let him do what he wants to do.' Warsh, who recently advocated for rate cuts but promised to be independent of the White House, will lead the FOMC's next policy meeting on June 16-17. The energy shock from the Middle East conflict has complicated what was already a challenging balance for the Fed this year, with the committee's increasingly hawkish debate on inflation coming as it prepares for this leadership transition. Waller, who was previously 'one of the most dovish members of the Fed, supporting rate cuts', has now shifted his stance, noting that 'inflation is the bigger concern, as he sees the job market as stable.'
Despite the shifting rate expectations, US equity markets have demonstrated remarkable resilience. According to The Financial Express, the S&P 500 and Nasdaq Composite have risen 9% and 13% respectively since the start of the year, while the Dow Jones Industrial Average has exceeded 50,000, up 4.6% year-to-date. However, rising bond yields pose significant risks, particularly for technology and growth stocks where higher capital costs could reduce future valuations. The December FOMC meeting remains at least six months away, leaving substantial time for market conditions and inflation data to influence the final policy decision. As noted by Oxford Economics, 'Financial markets are pricing in Fed rate hikes over the next 12 months, but we believe the bar is high. The Fed will likely talk tough but opt not to follow through with tightening monetary policy, as that would risk hurting the economy.'
