April FOMC: Three surprises as the Powell era closes

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The Federal Reserve kept its benchmark rates steady in April at 3.50% to 3.75%, in line with consensus market expectations. However, the meeting itself was far from uneventful. One official dissented in favor of a cut, while three others objected to language that still implied the next move would likely be lower. The committee’s easing bias narrowly remains intact, but the statement also described inflation as “elevated,” pointing to higher energy prices and the Middle East conflict as added sources of uncertainty.

In what’s likely his final meeting as Fed chair, Jerome Powell described current Fed policy as remaining “slightly restrictive,” and he stressed that no one on the Committee is currently arguing for a rate hike. At the same time, he made clear that the bar for easing has risen, and that the center of the Committee was moving toward a more neutral position. He also said the Fed would want confidence that the inflationary effects of the Iran war had peaked before cutting, in a nod to surging energy prices, with Brent trading as high as USD 126.4 per barrel early on Thursday. Powell also announced he will stay on in the role of Fed governor for an unspecified period after 15 May, in an unusual move for a departing chair.

Markets on balance took the outcome as modestly more hawkish, with the US dollar strengthening and Treasury yields rising across the curve. Beneath the broadly expected decision, the meeting exposed several fault lines that could keep the market on its toes into the next phase of Fed leadership:

The center of the FOMC is shifting, albeit cautiously. The most important signal from the meeting was not that the easing bias survived, but that support for it has weakened. Powell acknowledged that keeping the language was a closer call than at the March meeting and said more officials now favor a more neutral stance. That is broadly consistent with recent meeting minutes, which had already pointed to a greater preference for more two-sided guidance, even if rates do not move. In practical terms, this suggests the Fed is inching closer to a point where cuts are no longer the only live option in the statement.

Incoming Chair Warsh will arrive to a less unified committee. The most striking surprise was the scale of the dissent. Three regional presidents wanted the easing bias removed, while one governor again preferred an immediate cut, making it the most divided FOMC outcome since 1992. Outgoing Chair Powell was generally seen as a strong consensus builder, so an 8-4 split at his final meeting is notable. In our view, that raises the odds of less consistent communication and more volatile market pricing as the leadership handoff unfolds. It also suggests Warsh may inherit a committee that is already moving toward a more openly contested debate on rates.

Powell staying on shifts the composition of the Fed board. Powell sated that he will continue to serve as a Fed governor “for a period of time to be determined” and intends to “keep a low profile” in that role. Historically, governors tend to support the chair’s communication, and we would expect Powell to follow that pattern. But Powell’s continued governorship would also delay the opening of a permanent seat for a more dovish voter, such as Stephen Miran, whose temporary governorship will end once incoming Chair Kevin Warsh is confirmed.

So, while the meeting was less dovish at the margins than expected and poses some risk to the timeline for cuts, we do not think it invalidates our medium-term easing outlook. Our base case remains for the Fed to cut by 25 basis points in both September and December, because we see core inflation moderating from the second quarter, softer labor demand, and growth moving back toward trend in the second half. In our view, markets are still overpricing the risk that the Fed stays tighter for longer and underpricing the possibility that downside growth concerns return later this year. That keeps us constructive on quality fixed income. We continue to favor high grade and investment grade bonds, where current yields still offer an attractive opportunity to lock in income. We also maintain an Attractive view on emerging market bonds as a diversifier, while we keep a Neutral rating on high yield, where tighter spreads offer less compensation for added risk.