Federal Reserve Chair Jerome Powell tried to keep the central bank’s options open Wednesday by sticking with his view that interest rates are restrictive and that inflation was likely to resume its decline.

But a string of disappointing readings on price and wage pressures have led investors to put less weight on the central bank’s outlook and more attention on how the economic data unfold.

“Powell can say whatever he wants, but ultimately the inflation numbers will dictate what happens,” said Neil Dutta, head of economic research at Renaissance Macro Research.

The Fed maintained language in its policy statement Wednesday that suggested an interest-rate cut was still more likely than an increase—a so-called easing bias. But William English, a former senior Fed adviser, said it was possible that if inflation data continued to run hotter, the Fed would need to jettison that guidance, opening the door wider to hikes.

“What we learned was they are still a ways from that,” said English, a professor at Yale School of Management. “If they just don’t make further progress on inflation, it will be right at some point to say, ‘We don’t know what direction rates are going to go.’”

Indeed, while Powell cheered investors on Wednesday when he said he didn’t think it was likely the central bank would have to resume rate increases, he left the possibility open. “In terms of the peak rate, I think…the data will have to answer that question for us,” he said.

Two camps

Inside the central bank, one camp of officials has been worried about leaving rates too high for too long, especially if inflation and wage growth were decelerating.

Keeping rates at their current level, a two-decade high, for a longer period could cause more pain for regional banks, commercial real-estate investors and other industries that were particularly unprepared for the rapid increase in interest rates over the last two years.

Another camp has seen little need to cut rates this year because the economy is strong. They worried that inflation would get stuck at a level well above 2.5%, when the Fed targets 2%. They have wanted more evidence that the economy is slowing before entertaining rate cuts. The latest data have given more support to that latter group and raised the odds that officials wait to see more evidence of a slowdown—one that is frequently hard to reverse once it starts—before cutting rates.

Where’s the heat?

Powell cited a list of reasons to think high interest rates were indeed cooling demand, including a slowdown in hiring and a decline in the share of workers quitting their jobs.

And he said he continued to expect inflation to decline, partly because of the lagged behind effects of a slowdown in housing rents that have yet to feed through to official inflation measures.

“To get a sustained inflation, there has to be something generating that, and right now, there’s not an obvious area that is overheated and that is generating the likelihood of prices and wages going up,” said Eric Rosengren, former president of the Boston Fed.

It would be more worrisome, he said, if wages and salaries appeared to be reaccelerating, as a report on compensation growth hinted at on Tuesday. If wage growth settles above 4%, that increases the risk “that progress on inflation will be slower than most people were anticipating,” said Rosengren.

Dutta said he shares Powell’s view that there’s a significant source of lower price pressures ahead as housing rents slow and global inflation cools. “Are there signs that the labor markets are reheating? Not really,” said Dutta. “The case for weaker inflation is still strong, and until that changes, the Fed should maintain a dovish bias, quite frankly.”

Stuck at 3%?

Others worry that interest-sensitive sectors of the economy such as housing and manufacturing may have weathered the brunt of the Fed’s rate policies, creating the risk that a tight labor market sustains a reacceleration of growth that keeps inflation from falling much.

If inflation appears to be getting stuck around 3%, officials could face a more thorny set of conversations over what they should do. Diane Swonk, chief economist at KPMG, said she expected some Fed officials to float the prospect of tighter policy if that occurs, even though “it’s not where Powell wants to be.”

Powell on Wednesday sidestepped a question over whether rate increases had been discussed at the meeting. For his part, he said that if inflation proves “more persistent than expected and…is moving sideways,” then the Fed would hold off on rate cuts, as opposed to raising rates.

Powell also rejected the idea that the Fed would declare victory with inflation at 3%. “Of course we’re not satisfied with 3% inflation,” he said. “ ‘Three percent’ can’t be in a sentence with ‘satisfied.’ ”

For now, the Fed’s view that a rate cut is more likely than an increase “is a reasonable one,” said English. “I’m not inclined myself to think they should be raising rates today, but there is now a real possibility that the next move could be to the high side.”