Fed Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

The decision to keep rates unchanged at today’s FOMC meeting was as much of a certainty as there is in financial markets. That left three main questions for markets: Would the language in the statement change? Would there be a change in dissenters? Would Powell say anything about his plans after his term ends May 15?

On the language, there were minor tweaks in the statement, highlighting the Middle East uncertainty, elevated inflation and solid economic growth. Overall, not really much change. But that led into the answer to the next question. The dissension continued to evolve. At the last meeting, Chris Waller departed Dissenter Island for the Unchanged mainland, leaving Stephen Miran the only inhabitant on Rate Cut Avenue. The voting on the policy rate this time around stayed the same with only Miran dissenting. However, Beth Hammack, Neel Kashkari, and Lorie Logan decided to fire up the Fed Roblox account and create their own island. The three wanted to alter the statement by removing the “easing bias”, and instead balance it with commentary that the next move rate move is just as likely to be a hike as a cut. It was a continued Hawkish evolution of the committee. The last meeting in April was a Hawkish Hold, with Powell’s statement, “If we don't see that progress (on inflation) then you won't see the rate cut" providing a good summation. In addressing a question of why the easing bias was still in the statement, despite the growing upside inflation risks, he said the committee had the same discussion on this from last meeting, and while the number of supporters of a change in language increased, the final decision was “Why do we need to do it now?” There was no rush.

The market is now pricing in an 84% chance that the Fed keeps rates on hold through the December ’26 meeting, with a 13% chance of a 25bp hike. That’s a modestly hawkish move from yesterday’s 80% / 0% pricing.  

We saved the biggest news for last to hopefully keep you reading this. Powell announced his decision to stay on as a Governor after his term as Chair ends on May 15. He said this would be for an undetermined time. His decision was based on his concern from the legal attacks on the Fed, and not from the “verbal criticism” lobbed his way by unnamed heads of state. He said those legal attacks gave him “no choice but to stay”. In the April meeting Powell said he would stay on at the Fed until the investigations into the Fed were “well and truly over.” The DOJ announced last week it was ending its criminal investigation and referred the matter to the Fed’s inspector general. So the investigation is winding down but not yet truly over. The potential for Powell to stay on as chair pro-tempore, however, is likely gone after the Senate Banking Committee today voted to advance Kevin Warsh’s nomination as Fed chair to a final, full Senate vote. Assuming he gets confirmed, he will likely be able to take over for Powell by the end of Powell’s term. The vote went straight down party lines with every Democrat opposing the nomination and Senator Elizabeth Warren once again calling Warsh Trump’s “sock puppet” and “uniquely unfit”.  

During Warsh’s committee hearing last week, he hit on several talking points:

The upcoming Fed meetings could get very interesting if Warsh attempts to implement these changes with Powell staying on as governor and the committee diverging more in its outlook. 

Overall this was a somewhat hawkish Fed meeting but not dramatically so as this has largely been playing out publicly over the last few months as members of the Committee aired out their differing opinions, which have now been memorialized.  

Equity markets largely shrugged off today's event. The S&P 500 traded in about a 0.5% range ending the session a touch lower remaining quite resilient especially in light of the move higher in oil and escalation of rhetoric related to Iran. The sector level activity didn't shift dramatically either with tech continuing to outperform. Yield oriented sectors did move lower in the back half of the session.

There has been a steepening of the yield curve with the 2-7yr yields up ~9bps while 10/30yr are up ~5bps. The USD index moved modestly higher during the press conference.

After the close the mega-cap tech hyperscalers are reporting which will clearly have an outsized impact on major indices tomorrow. As the numbers are starting to roll in the stock reactions have been mixed but the growth rates on the cloud businesses have been eye-popping. It will also be a busy evening/morning of economic data and central bank rate decision. Overnight China PMIs, Japan Industrial production/retail sales and EU GDP/CPI and unemployment will be released. Ahead of the US open the BoE and ECB will have their rate decisions. The US economic data includes claims, personal income/spending, PCE and Q1 GDP.  

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