With inflation as high as 9% in the past year, Powell’s colleagues were all-in on the fight to curb price pressures, with another 25 basis-point hike expected Wednesday that might be the concluding increase. Yet that consensus is already showing signs of splintering, amid inflation that remains too high while Fed staff — and many private economists — see a recession in coming months.

Since Covid-19 threatened the US economy in early 2020, Powell has secured more than 98% of the Federal Open Market Committee’s votes in favor of his actions, first to stimulate growth during the recession and then to fight inflation in the past year. Rising dissents are more likely as the choices of battling inflation or much higher unemployment become more troubling. 

“This could be a pivotal meeting,” said Diane Swonk, chief economist at KPMG LLP. “We are getting close to the hardest mile for the Fed in this marathon — the part where backlash to rate hikes will intensify, in ways no one on the Fed has had to weather.” 

Fed officials have signaled that the FOMC will hike rates another quarter point at its May 2-3 meeting to a range of 5% to 5.25%, the highest since 2007 and part of the most aggressive tightening campaign since Paul Volcker took on double-digit inflation four decades ago.

The economy is also being buffeted by tighter credit in the wake of the failures of Silicon Valley Bank and Signature Bank. That’s equivalent to another half-point hike or more in the Fed’s target rate, according to economists surveyed by Bloomberg, resulting in tighter conditions across loan categories and especially for commercial real estate, where significant losses are expected.

Another big uncertainty is the looming US debt ceiling.

With the Fed staff and two-thirds of economists predicting a recession, that puts FOMC voters in an uncomfortable position of deciding whether to continue the inflation fight or try to cushion a slowing economy.

“Powell will have a harder time keeping the group together,” said Vincent Reinhart, chief economist at Dreyfus and Mellon who previously spent a quarter century working at the Fed. “It was easy last year when inflation was so far above goal because that dominated their sense of purpose. There are internal differences in opinion that are a feature of the diversity of the committee.”

The forward guidance at the May meeting could be a subject of intense debate given the conflicting views of the need to hike more.

The Fed’s forecasts in March show seven of 18 FOMC participants favored at least one more hike beyond the expected move to 5-5.25%, with one official looking for rates as high as 6%. The divisions are even greater for next year, with more than 2 percentage points of difference in the upper and lower forecasts for rates.

The committee may want to tweak its language from March that it anticipates “some additional policy firming,” but it might be hard to appease both policy hawks and doves. Officials may also be wary of investors loosening financial conditions in a way that would boost inflation.

“They have a problem here,” said Ethan Harris, head of global economics research at Bank of America Corp. “The outcome for the economy going forward is getting more uncertain. So they need to express some flexibility, but they don’t want to encourage the bond market to price in immediate rate cuts.”

Among the hawks, St. Louis Fed President James Bullard, who doesn’t vote this year, has urged pushing rates up to a 5.5%-5.75% range, arguing the economy is resilient and banking woes won’t be too costly. Some of that sentiment has been echoed by Minneapolis Fed President Neel Kashkari, a voter, and by Fed Governor Christopher Waller. 

Among the doves, Chicago Fed President Austan Goolsbee, a voter, has called for “prudence and patience” in assessing the impact of the banking stress on the economy, and the Philadelphia Fed’s Patrick Harker, another voter, has warned the Fed could move too much and cause an accident.

“At this point, I don’t see why we would just continue to go up, up, up and then go, whoops!” he said April 11. “And then go down, down, down very quickly. Let’s sit there.”

The FOMC is forecasting unemployment will rise to 4.5% at year’s end from 3.5% in March, an increase that some say would indicate a recession is under way. With the 2024 presidential election campaign already heating up, the Fed will be under more pressure over its choices. In the 1980s, Volcker endured protests from farmers and homebuilders, with the latter sending lumber to the chairman to register their displeasure.

“How would you explain your view that they need to lose their jobs?” Senator Elizabeth Warren asked Powell in a Senate hearing in March.

Powell has insisted that the Fed won’t prematurely loosen and won’t end the inflation fight until the Fed is sure price rises are headed back to the central bank’s 2% target, even as unemployment rises some.  He’s said the path could be bumpy – which could reinforce the view of the hawks that more hikes are needed.

“It is a difficult decision point for the Fed” as it weighs whether it’s done too little or too much, former Boston Fed President Eric Rosengren told a Tufts University EconoFact roundtable last week. “If the unemployment rate were to go up too quickly, that would be more challenging.”

–With assistance from Alex Tanzi.