The Federal Open Market Committee (FOMC) meets next week and now is a good time to update their communication for a world that is about to see more inflation.

Annual price increases have been above the Fed’s 2% target for five years, and the Iran war oil shock is landing in a context of structural changes and supply constraints across the U.S. economy.

Labor supply is less abundant, due to global demographics trends and the immigration crackdown in the US. Global trade integration – which produced disinflationary forces for the past two decades – is fractured and disrupted, and globalization as we knew it is essentially dead. The artificial intelligence boom’s forecasted energy needs exceed supply, according to most estimates, unless there is simultaneous investment boom in power generation. And the time horizon for the hoped-for boost in productivity that would lessen price pressures is highly uncertain. 

Energy Security Risks

Spot Brent crude prices are up 81% this year. While the futures market curve is pricing a sharp decline by the end of the year, investors do not appear to have internalized the physical destruction to infrastructure and the costs associated with building more resilient energy supply chains in the region. Even amid a fragile peace, there is likely to be a security risk premium in the market for many months to come as oil must transit the Strait of Hormuz.

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 which was first put in place during the 2024 easing cycle.

With those signals, investors anticipate the path of 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.

Symmetric Policy Outlook

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.

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 April 15 in an interview with CNBC. “I think there’s risk that we might need to be more accommodative or more restrictive, depending on how the data comes out.”

Scenario Discussion in the Minutes: The FOMC could use the minutes of the 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.

Scenario Discussion in the Press Conference: Minutes, however, are published with a delay, so they can be perceived as stale — especially given the fast-moving reality of the war. A timelier alternative would be for the chair to lay out scenarios representative of the full range of views of the FOMC during the press conference, and what those scenarios mean for the policy rate.   

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 on communication to the FOMC who is 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. As a complement to that, the committee could also 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.

Now is the Time

Higher 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.

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A version of this blog first appeared on MarketWatch.