Powell’s swan song – Steady as he goes

Executive summary

Federal Reserve (Fed) policymakers left rates unchanged in a range of 3.50% – 3.75%, which was widely expected. There were four dissenting votes, although only one specifically on the level of rates.

The Fed has acknowledged elevated inflation, partly driven by higher global energy prices, citing Middle East developments as a key source of economic uncertainty. More importantly, the committee noted an easing bias, pushing back on investor worries that the Fed’s next move would be a rate hike. The easing bias aligns with our view that the Fed should get the opportunity to lower rates later this year and remains on a course towards 3%.

Chair Powell clearly stated during the press conference that this was his last meeting as Fed Chair. However, he will stay on the Fed Board as a Governor for a “period of time.”

U.S. stocks and bonds extended their morning declines. The S&P 500 declined more than 0.5%; the 10-year U.S. Treasury yield rose just above 4.40%.

Lastly, we provide an update on the Warsh nomination, which is now moving forward and expected to be confirmed shortly, and Powell’s decision to remain at the Fed.

What happened

At its April rate-setting meeting, the Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate at 3.50% – 3.75%. However, four members dissented –the most in a single meeting in almost 34 years (October 1992) – although only one was based on the level of rates. Governor Stephen Miran dissented again, favoring a 25-basis point (0.25%) cut. The three other dissenters, while supporting maintaining the target rate, didn’t support the inclusion of an easing bias in the statement’s language.

During the post-meeting press conference, Chair Powell stated that this was his last meeting as Chair, welcoming Kevin Warsh as the next Chair of the Federal Reserve. 

Nonetheless, many of the reporters’ questions related to Powell’s future, which he mostly deflected. Yet, he shared some thoughts about Fed communications, which is among the topics Warsh has publicly discussed since being tapped to be the next Fed Chair. For instance, Powell mentioned he wasn’t the biggest fan of the so-called “dot plot” and that the Fed was the only major central bank without a single, centralized forecast.

The Fed has acknowledged the elevated level of inflation, in part reflecting the increase in global energy prices, and that the developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.

Our take

We didn’t expect a change to the Fed’s rate policy at this meeting, particularly given the uncertainty in the aftermath of the Iran situation and stickier inflation.

The Fed is (rightly) maintaining a wait-and-see approach. As Chair Powell noted, the committee should look through the spike in crude oil prices, which should prove to be temporary. However, we need to get some resolution regarding the Strait of Hormuz, which would likely cause a sharp decline in crude oil prices.

We continue to expect the Fed to reduce policy rates, but it could be delayed until the latter half of the year, allowing policymakers time to gather more information about the impact on inflation as a result of the Iran situation.

Bond market implications

The closure of the Strait of Hormuz has halted the distribution of crude oil from the region, pushing up energy prices and near-term inflation expectations. Traders are currently positioned for the Fed to remain on hold until at least the middle of 2027. In response, 2- to 30-year U.S. Treasury yields are flirting with 10-month highs, though measures of rate volatility have eased since the conflict in Iran hit peak intensity in late March.

In the trading hours ahead of today’s FOMC rate announcement, yields rose based on reports that President Trump is prepared for an extended blockade of the Strait of Hormuz. Once the committee’s official statement was released, yields extended their rise primarily based on the dissenting votes from four FOMC members. It seems the committee may be using dissents to signal that, in light of the current geopolitical and inflation uncertainty, the Fed is taking a step back from a slightly dovish bias in favor of a clearer wait-and-see strategy. The Fed remains caught between the two sides of their dual mandate – full employment and price stability. The near-term inflation outlook is clouded by the conflict in Iran while job growth remains subdued.

Yields drifted a few basis points higher across the curve once Chair Powell held his press conference, perhaps attributable to his reveal that he will remain on as a Fed Governor for a “period of time” after his role as Fed Chair concludes next month. As Powell exited the stage, 2-year and 10-year U.S. Treasury yields were trading at roughly 3.94% and 4.41%, respectively, which are now approximately 35-50 basis points (0.35-0.50%) higher year to date.

If the Fed can resume gradual rate cuts in the second half of this year as we expect, yields in the first few years of the yield curve should decline in sympathy. In an economic environment that warrants further easing, we would expect yields between 5- and 30-year maturities to decline as well, though likely to a lesser degree (i.e., the “stickiness” continues). How quickly and to what degree intermediate and longer-dated interest rates fall will be primarily dependent on how quickly a resolution is achieved in the Middle East. Also, the ongoing concerns around the U.S. government’s debt burden could dampen their declines.

U.S. Treasury yields, which are the primary driver of core fixed income yields in general, are slightly above our assessment of fair value. In late March, we upgraded our view of duration from neutral to more attractive when yields were similar to current levels. For portfolios concentrated in cash, very short-dated fixed income instruments (e.g., U.S. Treasury bills, money market mutual funds), or positioned below benchmark duration, the recent rise in yields creates a compelling entry point to add intermediate and longer-dated exposure. The 3- to 10-year maturity range offers a compelling balance of attractive income and moderate interest rate risk. We expect interest rate volatility to stay elevated in comparison to the benign rate environment of late 2025.

Bottom line

The Fed held rates steady, as widely expected, despite four dissents. Policymakers acknowledged elevated inflation is partly driven by higher global energy prices, while signaling an easing bias, pushing back on fears of a rate hike. That aligns with our view that rates can move toward 3%, though the recent energy price spike is likely to keep the Fed on hold until the latter half of 2026. Lastly, Chair Powell confirmed this was his final meeting as Chair, but he’d remain on the Board for a “period of time.”

Addendum: Warsh nomination finally moving forward

President Trump’s nomination of Kevin Warsh as Fed Chair had been held up by Senator Thom Tillis (R – North Carolina), who refused to vote on any Fed nominees until the Department of Justice (DoJ) resolved its investigation into the Fed’s building renovations. Last week, the DoJ handed oversight of the matter to the Fed’s inspector general and provided assurance to Sen. Tillis, who then publicly lifted his objection and said he’d vote to confirm Warsh.

Today, Warsh’s nomination was passed in the Senate Banking Committee, which signals that it will achieve a full Senate confirmation vote quickly thereafter. That would get Warsh seated by May 15^th, which is the end of Chair Powell’s second four-year term as Chair of the Federal Reserve.

Yet, the renovations probe isn’t fully resolved. While Powell’s term as Chair is ending, his term as a Fed Governor does not expire until January 31, 2028. Powell announced today that he will stay on the Board simply as a Governor, would support Warsh, and won’t act as a “shadow Chair” to undermine policy decision-making.

While it’s a bit of a distraction, we don’t view Powell’s continued presence as a hinderance to Warsh’s ability to lead the Fed. This is supported by Powell’s comments during the press conference.