As Fed holds rates steady, there are divisions over what the next moves will be

THE Jerome Powell era of the US Federal Reserve is over and, with it, the latest interest rate-cut cycle.

The 73-year-old oversaw the Fed’s policy decision for the last time on Wednesday (Apr 29). He leaves behind a solid but turbulent US economy with a stagnant jobs market, rising inflation and a board that is split over the central bank’s next move.

The Fed held rates steady as expected between 3.5 and 3.7 per cent, but there were sharp divisions over what to do next.

Three voting members of the Fed’s rate-setting committee – Lara Logan, Neel Kashkari and Beth Hammack – dissented because Powell chose to leave in language in the Fed’s statement that indicated a bias towards cutting rates next.

The three members have clearly moved to a more hawkish position, and may be preparing to push for a rate hike should inflation rise any further.

Another voting member, governor Stephen Miran, dissented because he disagreed with the rate hold, preferring an immediate rate cut.

At what proved to be his final press conference as Fed chair, Powell admitted that the hawks – those who wanted to remove the bias – could hold sway at the next meeting in June, unless the Strait of Hormuz reopened very soon.

Powell conceded that there was a growing chance that the inflation in oil, food and fertiliser prices, caused directly by the closure of the key waterway, could “bleed through” to prices of core goods and services.

In the wake of the Fed’s statement and press conference, US Treasury yields rose and the odds of a rate hike sometime in 2027 increased sharply in the Fed funds futures market.

Before the Iran war began, all futures markets pointed to a rate cut as the Fed’s most likely next move. That logic has now flipped entirely on its head.

Powell said he would not return as chair, and he took the opportunity to congratulate his successor, Kevin Warsh, on the advancement of his nomination through the Senate banking committee, which sets up a likely Senate confirmation.

Powell – one of the few people in public life who has gone toe-to-toe with US President Donald Trump in the latter’s second White House stint – is not finished with this particular fight, it seems.

He vowed to remain on the Fed’s board until such time, as the criminal investigation into his handling of a controversial renovation job at the Fed is “well and truly over with transparency and finality”.

Powell cast the legal “assaults” that the Trump administration has “battered the institution with” as a threat to the central bank’s independence. Fed officials anticipate more meddling from Trump, said Powell.

While promising not to become a “shadow” chair and to support Warsh’s leadership, Powell made it clear he wanted to stay on as a governor largely to act as a guard dog for the Fed’s continued independence.

Some nations ensure their central banks operate without consideration of the political impact. Others, said Powell, allow their political leaders to tell central bankers what to do.

“There’s a bright line between those that do one and those that do the other,” added Powell.

All successful modern economies have independent central banks, he noted. All those with compromised central banks end up failing. If interest rates are cut to win elections, inflation is never kept under control, he pointed out.

There are those who feel that the Fed is likely to remain independent, with or without Powell on the board.

Treasury Secretary Scott Bessent, however, said that Powell’s intention to remain violated the Fed’s customs.

During his Senate hearings, Warsh insisted that he was not Trump’s “sock puppet”.

The history of presidential appointments on independent bodies, including the Supreme Court, suggest that Trump may not find Warsh as accommodative to his views once he is in the seat of power, said JD Joyce, president of Texas-based financial advisory Joyce Wealth Management.

Indeed, one brokerage said that Warsh may have negative surprises for the Treasury market, in addition to surprising Trump.

“The market’s reaction to the end of the Department of Justice’s investigation of Powell implied most investors see the switch from Powell to Warsh as mildly dovish,” said economists at brokerage Goldman Sachs.

“We are less confident because Warsh and Powell have actually had similar views on inflation and interest rate policy, at least before the war.”

The economists boosted their US inflation target for the year to 2.6 per cent for core inflation, above recent levels.

Even as Powell makes his exit from the Fed’s top job, he could point to having enjoyed some success during his term.

Inflation at just above the central bank’s long-term target and unemployment at low levels is not bad for an economy that, by Powell’s count, is in the midst of the fourth supply shock of his tenure.

These four are the Covid-19 pandemic, the Ukraine war, Trump’s tariffs and the oil shock caused by the Iran war.

Powell later promised that he would keep a low profile as a Fed governor. On that note, he has certainly earned some well-deserved rest.