It was Jerome Powell’s final policy-setting meeting as US Federal Reserve chair, but he’s not ready to exit the stage entirely.
The central bank kept the federal-funds rate unchanged in today’s meeting, which surprised no one. The rate has been held in a target range of 3.50%-3.75% since the last cut in December 2025. Before the recent pause, the rate was cut by a cumulative 1.75 percentage points from September 2024 to December 2025.
Of the 12 Federal Open Market Committee members, 11 opted for unchanged rates, with Stephen Miran being the lone (and perennial) dissenter, pushing for a cut.
Today’s press release was largely the same as the one following the prior meeting. Intriguingly, though, three FOMC members announced that while they supported today’s decision, they “did not support inclusion of an easing bias in the statement at this time.” But since the statement merely references “additional adjustments” to the federal-funds rate without specifying a direction, it’s hard to interpret the qualification as anything more than a stylistic quibble.
The bond market may be gleaning more of a signal here, as the probability of a 2026 rate cut has fallen toward 3% today from over 18% yesterday, although higher oil prices are also driving this. Regardless, we agree that a cut in 2026 is highly unlikely. We don’t expect rate cuts to resume until 2027.
As Powell stated, prices in the Personal Consumption Expenditure Index are likely to be up 3.5% in the 12 months ending in March (the data will be released Thursday), their highest level since 2023. That figure is predicted to rise further to around 3.8% in April’s data.
For now, we still think the Fed is correct in thinking that by postponing further rate cuts, it can keep inflationary pressures under control. The impact of the oil shock and tariffs should eventually fade. Meanwhile, slack in the labor market and the resulting downward trend in wage growth should put downward pressure on underlying inflation.
The ‘Unanchored’ Inflation Scenario for Rates
However, our (and the Fed’s) sanguine assumptions about inflation could be wrong if the Iran war drags on for much longer than expected and/or the inflationary process becomes “unanchored,” with high inflation acquiring self-perpetuating momentum. In that scenario, the Fed would have to forswear rate cuts through 2027, and perhaps even raise rates slightly.
Our current assessment is that incoming chair Kevin Warsh will set monetary policy appropriately tightly if high inflation calls for it, despite President Donald Trump’s hopes that he will usher in much looser policy. The Fed’s commitment to proper monetary policy should be especially secure to the extent that Powell remains on the Board of Governors, which he says he plans to do (with the duration of his tenure “to be determined”). If Powell stays on, then recent appointee (and the closest thing to a Trump acolyte) Miran will be forced to yield his spot to make room for Warsh.
Powell said he is mainly focused on ensuring that the threat of “legal attacks” on the Fed diminishes before he steps down as governor. However, we can’t help but think that his investment in monetary policy being conducted with proper care and independence is also a factor. While Powell said he has no interest in being a sort of “shadow chair,” he would undoubtedly serve as a rallying point for embattled Fed personnel.
