The decision to hold at 3.50 – 3.75% was fully priced and entirely expected. What was not fully anticipated was Powell remaining on the Board of Governors and the degree of division the meeting exposed.
Powell said he would stay on as a governor for an amount of time “yet to be determined” while waiting for the ongoing Department of Justice investigation to be over “with finality and transparency”. His official term as a governor runs until January 2028, but past practice is for members to step down when their term as chair ends.
Such a development, which broadly surprised the market, adds a further layer of complexity to a transition amid a divided committee, a common theme across other major developed market central banks that announced policy decisions last week. Four Fed officials dissented—Miran, Hammack, Kashkari and Logan—with three of them objecting to language implying the central bank would eventually resume cutting rates. For a committee ostensibly aligned on a wait-and-see posture, that is a meaningful fracture—and a complicated inheritance for Warsh to manage.
What to Expect from Warsh
We have written here before about what we could expect from a Warsh-led Fed, a prospect that took a step closer last week when the Senate Banking Committee voted 13 – 11 in favor of his nomination, putting him firmly on track for full Senate confirmation before Powell’s term expires on May 15. With Republicans holding a narrow Senate majority and Warsh needing only a simple majority, the outcome is not seriously in doubt.
For anyone who has followed Warsh’s writings and public commentary, the comments he made during his hearing last month offered few surprises. But there were markers worth noting—signals of where he intends to take the institution in the intermediate term.
His view on the Fed’s balance sheet, for instance, is that reduction is necessary, but must be slow and carefully sequenced to avoid market disruption. The key insight is that he views balance sheet policy and rate policy as complementary, meaning gradual shrinkage could proceed alongside front-end rate cuts rather than one at the expense of the other. That is a more nuanced position than the hawks on the committee would prefer, and we believe it has direct implications for how the curve trades under his stewardship.
On inflation, Warsh has long been skeptical of the Fed’s 2020 shift to flexible average inflation targeting, favoring a strict return to 2% with greater weight given to alternative inflation measures. His view—that there is more disinflation in the system than headline numbers currently reflect—is one we find persuasive, potentially providing the foundation for further easing.
What It Means for Rates
Divided as it is, the committee Warsh inherits is already in motion. Powell noted last week that the center of the Federal Open Markets Committee (FOMC) is gravitating toward a more neutral policy stance, and that the majority does not feel compelled to signal that shift—partly because of uncertainty generated by the Middle East conflict. His framing was telling: “People are not saying we need to hike now.” In our view, this is not a ringing endorsement of the status quo; it is a committee holding its nerve while the data develops.
Our baseline expectation is that the FOMC remains in an easing cycle, with additional cuts taking the policy rate to between 2.75% and 3.25%—broadly in line with the Fed’s own estimated neutral rate—supported by a softening labor market and a more dovish committee under Warsh. Indeed, market expectations of zero to one cut this year look too conservative. The risks are skewed toward elevated inflation and delayed cuts, but the direction of travel is clear.
Overall, we believe the hawkish rate-pricing of recent weeks is overdone. Policy sits at the upper boundary of restrictive, and the market remains singularly focused on the energy shock’s inflation impulse while underweighting the growth drag building underneath it. We favor the front end of the U.S. curve, where that mispricing is most visible, while staying cautious on the 30-year, where sovereign supply pressures, fiscal uncertainty and the structural consequences of balance sheet reduction have yet to be fully reflected in term premium.
The Fed’s new era raises as many questions as it answers: how Warsh navigates the White House, whether Powell’s presence on the board creates friction and how quickly a divided committee finds its footing under new leadership. Those questions will take time to resolve. What is clear is that the transition is already shaping how rates trade.
What to Watch For
Tuesday 5/5
- Australia RBA interest Rate Decision
Wednesday 5/6:
- U.S. ISM Non-Manufacturing Purchasing Managers’ Index
- U.S. ISM Non-Manufacturing Purchasing Managers’ Prices
- U.S. JOLTS Jobs Openings
- U.S. New Home Sales
Thursday 5/7:
- U.S. ADP Nonfarm Employment Change
- U.S. Initial Jobless Claims
Friday 5/8:
- U.S. Average Hourly Earnings
- U.S. Nonfarm Payrolls
- U.S Unemployment Rate