FOMC meeting, April 28-29

Fed on hold with an easing bias that dissatisfies a few

• The Federal Reserve kept the federal funds rate unchanged at a target range of 3.50%–3.75% at the April Federal Open Market Committee (FOMC) meeting, but the decision was marked by four dissents – the largest since 1992. As expected, Governor Stephen Miran dissented in favor of a quarter-point cut, while regional Fed presidents Lorie Logan, Neel Kashkari and Beth Hammack supported holding rates steady but opposed the easing bias embedded in the statement.

• The easing bias stems from retaining language around the “extent and timing of additional adjustments.” This contrasts with the alternative of a two-sided formulation that would have explicitly had rate hikes on the table should inflation prove more persistent. Beyond that, the statement pointed to firmer inflation dynamics, reflecting higher energy prices tied to the Middle East conflict while reiterating that the Committee remains attentive to both sides of its mandate. The conflict itself was framed as a key source of elevated uncertainty around the outlook.

• During the press conference, Fed Chair Jerome Powell reiterated that a mildly restrictive policy stance is “well positioned” to evaluate the effects of the Middle East conflict on growth and inflation. He acknowledged that the center of the Committee is gradually shifting toward a more neutral stance, but he emphasized that a majority did not support moving to a two-sided statement. His rationale was twofold. First, market pricing already reflects an understanding of the Fed’s reaction function, with no rate cuts priced for 2026. Second, a majority of policymakers were wary of signaling an excessively restrictive stance by altering forward guidance.

• With his term as Chair ending on May 15, this meeting marked Powell’s final press conference in that role with his last words being “I won’t see you next time.” However, he indicated he will remain on the Board until the Department of Justice investigation is “well and truly over with transparency and finality,” emphasizing the importance of conducting monetary policy without regard to political considerations.

• Our impression is that this decision is less about policy positioning and more about preserving institutional continuity and safeguarding against risk of politicization or institutional erosion. This is particularly relevant in an environment where credibility and independence are central to policy effectiveness.

• Looking ahead, while we continue to expect easing inflation in the latter part of 2026 alongside further softening in labor market fundamentals, we no longer anticipate a rate cut in December. Powell’s acknowledgment that market’s interpretation of the Fed’s reaction function is broadly accurate reinforces the view of a Committee on hold through the remainder of the year.

The policy statement noted that economic activity continues to expand at a “solid” pace, job gains have “remained low on average” and inflation is “elevated,” partly reflecting higher global energy prices. It also emphasized that the Middle East conflict is contributing to a high level of uncertainty around the outlook, while reaffirming that the FOMC remains attentive to risks on both sides of its dual mandate. Notably, guidance on the “extent and timing of additional” policy adjustments was retained, preserving an easing bias.

During the press conference, Powell stressed that the policy stance is in a “very good place for us to wait and see.” He characterized policy as at the high end of neutral or perhaps mildly restrictive, noting increasing labor market stability even as inflation is “misbehaving.” He added that the labor market is still gradually cooling and saw little case for policy being meaningfully restrictive. In his view, the current stance allows the Fed to remain patient and assess incoming data.

The broader challenge is that the US economy is confronting the price of growth. A sequence of supply shocks — from trade policy and tariffs to demographics and immigration, and now the Middle East conflict — continues to put upward pressure on inflation while weighing on growth. As Powell noted, policymakers have been operating in a “situation of supply shocks … for six years.” To that list, we would add the positive shock from a likely AI-led technology cycle. This environment of layered supply shocks complicates policy calibration and reinforces a wait-and-see bias.

While we expect most of the 0.8–1.0 percentage points (ppt) inflation lift from tariffs to dissipate over the next 12 months, the Middle East conflict should continue to exert upward pressure on energy and food prices, with limited passthrough to core. Our baseline sees headline personal consumption expenditures (PCE) inflation at 3.2% year over year (y/y) in Q4 and core at 2.9%.

With risks to both sides of the mandate rising, the Committee is placing greater weight on a balanced approach — considering both the magnitude and timing of deviations. In this context, inflation is drifting away from target while the labor market appears broadly in balance, even if uncomfortably so.

The Fed typically eases for “good” reasons (disinflation) or “bad” reasons (labor market deterioration). In this context, Kevin Warsh will inherit a highly data-dependent Committee focused on inflation risks, suggesting a moderately restrictive stance remains appropriate. A meaningful dovish shift will be difficult.

Leadership transition

Powell’s term as Chair ends on May 15, 2026, while his term as Governor runs through January 2028. With the Department of Justice investigation now dropped and Senator Thom Tillis signaling support, the path for Warsh’s confirmation has effectively cleared. The Senate Banking Committee has advanced the nomination along party lines (13–11), setting up a formal transition in leadership.

Powell indicated he will remain on the Board “at least” until the investigation is fully resolved with transparency and finality – likely reflecting concerns that, despite the case being dropped, it could be reopened following recent public commentary. 

He emphasized that this decision is guided by what he views as being in the best interest of the institution, with his tenure as Governor extending for a period yet to be determined. Addressing whether this could be perceived as political, he pushed back, framing the decision as a response to recent developments and the need to see the process through. His concern centers on a series of legal challenges that risk undermining the Fed’s ability to conduct monetary policy without political interference – distinct from routine criticism by elected officials.

Powell added that he expects “a very normal, standard kind of transition process.”

A new Fed regime

Warsh’s public commentary highlights a tension in how inflation is interpreted. He has emphasized that inflation is a Fed “choice,” while expressing less conviction that easier policy would necessarily generate additional inflation. Instead, he points to AI-driven productivity gains as a potential disinflationary force that could allow for lower rates over time.

Beyond the rate path, his views extend to the policy framework. He has signaled a preference for reduced reliance on forward guidance, particularly the dot plot and Summary of Economic Projections (SEP); called for a reassessment of inflation measurement; and advocated for a smaller balance sheet. He has also raised questions about the Fed’s structure, including the role of regional banks. Taken together, this suggests a more discretionary and potentially more centralized approach, with less reliance on established communication tools, implying greater institutional uncertainty rather than an immediate policy shift.

It is important to distinguish between policy influence and institutional influence. While the Chair shapes the debate, decisions remain Committee-based. The more consequential shift may lie in how the institution operates via its communication, governance and internal balance.

In that context, Powell remaining on the Board is less about policy positioning and more about institutional continuity, helping preserve the existing framework and guard against perceptions of politicization or erosion. There is precedent, though rare: Marriner Eccles remained on the Board after his chairmanship during the period leading to the 1951 Fed–Treasury Accord.

A sustained challenge to perceived independence would likely manifest in higher long-term yields, reflecting rising inflation risk premia, concerns about fiscal dominance and uncertainty around the Fed’s reaction function. The transmission would be tighter financial conditions — weighing on investment and housing, reducing the attractiveness of dollar assets and ultimately dampening growth.