Fed Chief Powell on the Exit
Door and “Wait-and-See” Rate Policy to
Continue
The Federal Reserve is expected to hold
interest rates steady this week as Jerome H. Powell presides over what is
likely to be his last meeting as chair.
1.
Jerome H. Powell is set to chair his final Federal Reserve meeting,
marking the end of his tenure.
2.
Kevin M. Warsh, backed by Donald Trump, is moving closer to
becoming the next Fed
Chair, pending Senate approval.
3.
Despite leadership change, the “wait-and-see” monetary policy approach
is expected to continue.
4.
The Federal Reserve has kept interest rates steady at 3.5%–3.75% since December,
and is widely expected to hold them again.
5.
Inflation concerns—driven by rising energy prices following
the US-Iran conflict 2026—are
limiting the scope for rate cuts.
6.
Oil prices have surged ~50%, pushing up costs of fuel, transport,
and food, with inflation reaching 3.3%
in March.
7.
Fed officials, including Christopher J. Waller, warn that
sustained high energy prices could entrench
inflation and slow growth.
8.
Market expectations indicate no rate cuts in 2026,
reflecting persistent inflation risks despite stable employment (~4.3%
unemployment).
9.
Even pro-cut voices like Scott Bessent now support a cautious approach.
10.
Rate decisions are made by a 12-member Federal Open Market Committee
(FOMC), meaning the Chair does not have unilateral control.
11.
Powell may remain
on the Fed Board until 2028, which could limit Trump’s
influence over future appointments.
12.
Warsh is expected to push institutional and policy changes, but may
face:
·
Internal resistance within the Fed
·
Political pressure from the White House
Overall Insight:
While leadership at the Fed is changing, policy
continuity is likely, with inflation risks and geopolitical
factors outweighing political pressure for aggressive rate cuts.
This
week’s Federal Reserve meeting is set to be Jerome H. Powell’s last as chair of
the central bank. But the “wait and see” policy path that he carefully carved out
amid resurgent inflation risks is likely to stay intact long after he leaves the
top job.
On
Wednesday morning, President Trump’s handpicked successor, Kevin M. Warsh, is expected
to take a significant step toward becoming the next Fed chair when Republicans on
the Senate Banking Committee clear him for a full Senate vote. Hours later, the
Fed will announce its latest rate decision, followed by what looks poised to be
Mr. Powell’s final news conference as chair.
New
leadership at the Fed will not automatically usher in a sea change in the outlook
for interest rates, however. Since December, officials have kept them in a range
of 3.5 percent to 3.75 percent, much to Mr. Trump’s chagrin. The president wants
substantially lower borrowing costs and has made it clear that he expects Mr. Warsh
to deliver them.
But
Fed policymakers project no urgency to restart rate cuts, and Mr. Warsh has said
he did not promise Mr. Trump to ease policy in order to get the job, even as Senate
Democrats have questioned whether he would serve as the president’s “sock puppet.”
On Wednesday, the Fed is widely expected to hold rates steady again. In fact, traders
in financial markets that track the trajectory of rates predict no pivot toward
cuts at all this year.
“The
path to cutting is one that is much more fraught now than it seemed a few months
ago,” said Nathan Sheets, chief economist at Citi and a former official at the Treasury
Department.
The
Fed’s caution around rate cuts crystallized in the wake of the war with Iran, which
is pushing inflation further from the central bank’s 2 percent target while raising
the specter of slower economic growth.
A
roughly 50 percent jump in oil prices since the start of the war on Feb. 28 has
rippled across the economy, lifting gasoline costs, airfares and shipping fees.
Soaring fertilizer prices have prompted concerns about rising grocery bills, which
would add yet another expense for Americans who have faced higher prices in the
last year because of Mr. Trump’s tariffs. The latest Consumer Price Index report
showed that annual inflation was 3.3 percent in March, almost a full percentage
point higher than the pace in February.
The
longer energy prices remain elevated, “the greater the chances that higher inflation
gets embedded across a wide variety of goods and services, various supply chain
effects start to emerge, and real activity and employment start to slow,” Christopher
J. Waller, a Fed governor who was in the running to replace Mr. Powell, said in
a speech this month.
Just
a handful of months ago, Mr. Waller was so worried about the labor market that he voted for a quarter-point rate cut in January.
Monthly jobs growth has started to pick back up again, and the unemployment rate
has steadied around 4.3 percent, indicating a more stable situation.
Against
this backdrop, even some of Mr. Trump’s biggest supporters have changed their tune
about rate reductions. Treasury Secretary Scott Bessent said this month that the
Fed should “wait and see” before lowering borrowing costs. Stephen I. Miran, who
consistently called for aggressive rate cuts after Mr. Trump appointed him as a
Fed governor last year, has endorsed a slower pace of reductions in light of what
he described as “a little bit less favorable” inflation
dynamics.
“Energy
developments have changed the distribution of risks,” he said in public remarks
recently. “They’ve increased the risks of higher inflation.”
For
Jon Faust, a fellow at the Center for Financial Economics
at Johns Hopkins University and a former senior adviser to Mr. Powell, those comments
suggest that “everyone but Trump is resigned, no matter who’s
chair, to a sustained hold until things clarify some.”
Support
for cuts is unlikely to grow unless the labor market takes
a turn and starts to deteriorate more notably. Policymakers will also want to have
tangible evidence that inflation from both the war and last year’s tariffs has subsided.
Some officials seem willing to acknowledge that the Fed is equally likely to have
to consider rate increases, although no one yet thinks that is the most probable
outcome.
As
chair, Mr. Warsh would have sway over the rate debate but not final say. Decisions
are made by a 12-person committee, which also includes the six other members of
the board of governors, the president of the Federal Reserve Bank of New York and
a rotating set of four presidents from the 12 regional banks.
Among
those who could still get a vote is Mr. Powell.
Just
days before the Fed’s policy meeting was set to begin on Tuesday, it was not entirely
clear if he would step down as chair when his term ended on May 15. A criminal investigation
into Mr. Powell and the central bank had held up Senate confirmation of Mr. Warsh.
Mr. Powell had pledged to remain chair temporarily if Mr. Warsh was not confirmed
in time.
But
on Friday, the ground shifted. In an about-face, the Justice Department dropped
its inquiry into renovations at the Fed’s headquarters in Washington, but kept open
the possibility of restarting it at any point. By Sunday, Senator Thom Tillis of
North Carolina, a pivotal Republican on the Banking Committee, said federal prosecutors
had given him sufficient assurances that Mr. Powell’s legal threats were over.
Mr.
Powell still faces a high-stakes decision on whether to stay on as a governor, which
he can do until January 2028. That would prevent Mr. Trump from filling the seat
with someone more amenable to his wishes to lower rates and gain more control over
the central bank.
Mr.
Powell has said he would not leave the board until the criminal investigation was
“well and truly over, with transparency and finality.” He added that his decision
would depend on what he thought was “best for the institution and for the people
we serve.”
Mr.
Tillis suggested on Sunday that the Justice Department might still appeal a federal
judge’s ruling that quashed the subpoenas against the Fed. He said such a move would
be not about pursuing Mr. Powell but about defending the power of prosecutors to
issue subpoenas. An appeal, however, is likely to encourage Mr. Powell to stay.
That
could make for an awkward transition period for Mr. Warsh, who wants to pursue sweeping
changes to the way the Fed operates, including the data it favors
to make rate decisions, how it communicates any policy pivots and its footprint
in financial markets.
Mr.
Warsh’s ability to enact these changes would require broad internal support, something
he would have to build while also managing Mr. Trump’s ire if he did not pursue
the policy that the president wanted.
“I
don’t think he gets much of a honeymoon period,” Mr. Faust said. “He’ll be in the
firing line Day 1.”