Powell’s Last Meeting as Fed Chair, Rates on Hold, a Dispute Over Future Bias

The Fed can say what it wants, but the price of oil is more important.

Fed FOMC Statement

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 3‑1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Philip N. Jefferson; Anna Paulson; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/4 percentage point at this meeting; and Beth M. Hammack, Neel Kashkari, and Lorie K. Logan, who supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.

Powell Era End

The Wall Street Journal reports Fed Closes Powell Era with Rates on Hold and Divide Over What Comes Next

Officials held their benchmark federal-funds rate steady in a range of 3.5% to 3.75% and, in their policy statement, made no changes to language that has signaled the next move in rates was more likely to be down than up.

But that statement drew dissents from four out of 12 members, the most at a policy meeting since 1992. The divisions underscore the challenge that Powell’s successor, Kevin Warsh, could face as the central bank navigates new inflation hazards from the energy shocks.

Changing of the guard

Wednesday’s meeting effectively closes an era at the central bank spanning two decades. Powell, whose term as chair expires on May 15, adopted and added his own stamp on a framework for setting and communicating monetary policy that his immediate predecessors, Ben Bernanke and Janet Yellen, designed in the years after the 2008-09 financial crisis.

Under that framework, the Fed leaned more heavily on public communications to articulate how it planned to meet its objectives of healthy labor markets and low inflation. It also sought to enlist financial markets as a partner in tightening or easing before officials moved rates.

The last mile on inflation

For all the ambitious changes Warsh has in mind, he will inherit a more immediate challenge: The economy is absorbing its fourth supply shock in five years. The Middle East conflict and last year’s tariffs have hit an economy where a key inflation metric peaked at 7% in 2022 after the pandemic reopening and the war in Ukraine. The cumulative effects are testing the Fed’s confidence that inflation, which is running around 3%, will return all the way to its 2% goal.

Officials are puzzling over possible explanations, each with different implications for where to set rates. The first, and the one most widely cited by the Fed, is that goods-price increases attributed to tariffs will soon fade, putting disinflation back on track. Another possibility is that current monetary policy isn’t as restrictive as officials had thought, which would argue for keeping rates at least at current levels for longer.

The most unsettling scenario is that businesses have grown more willing and able to pass higher costs through to customers, a behavioral shift that would mark a meaningful break from the prepandemic environment in which firms absorbed cost increases to avoid losing market share.

Not Much of a Puzzle

1. Tariffs rate to be one time. But that time rates to take a long time.
2. Tariff passthrough is over or nearly over for the tariffs that were collected, voided, and now in the process of being refunded.
3. Trump implemented new tariffs. They are higher than before, harder to avoid, and more economically damaging (more inflationary and recessionary). The full impact of the new tariff replacement is not yet felt.
4. Oil stupid (and fertilizer, helium, aluminum, diesel, jet fuel, etc.) These are definitely inflationary and recessionary.

Add it up and the next move is a hike. The market shifted that direction today.

There’s Upward Pressure on Interest Rates With a Slight Bias for Fed Hikes

Earlier today, I noted There’s Upward Pressure on Interest Rates With a Slight Bias for Fed Hikes

We have roughly an 8-basis point move from yesterday to today. That’s about a third of a quarter-point tightening bias.

Q: What happened?
A: Oil

For discussion, please see Trump Says He’s “No More Mr. Nice Guy”, Oil Jumps 5 Percent to $105

An economically illiterate trump warns the markets.

It remains to be seen how much more pain Trump, Iran, or the world will take.

The longer the blockade lasts, the more upward pressure there is on the price of oil, gasoline, diesel, aluminum, fertilizer, and interest rates.

The price of oil is far more important than anything Powell says today.

On April 15, I commented Trump Threatens to Fire Powell if He Doesn’t Resign When Fed Chair Term Ends

Trump’s threat makes it far more likely Powell stays on.

In the press conference Powell stated that he is not leaving the Fed for an undetermined period of time.

Powell said he will leave when he feels the time is appropriate. He wants the investigation over with “complete finality”.

Trump statements backfired again. His threats frequently have the opposite impact.

If Trump tries to fire Powell, then Powell may be on the Fed for years. Powell’s term as Fed governor does not formally end until January 2028.

Importantly, Powell noted “The Fed Chair only has one vote”. I have mentioned that many times including right before this meeting.