Tonight, Powell's "Last FOMC": Likely to Hold Steady, But with a Hawkish Tone

Original Author: Zhao Ying

Original Source: Wall Street Sights

The outcome of the Fed's April FOMC meeting is almost a foregone conclusion—interest rates will remain unchanged. However, the true focus of this meeting lies in what signals will be released at Powell's last policy meeting as Chair, and whether the committee will formally convey a hawkish stance to the market that "rate cuts are essentially off the table."

The Federal Reserve will announce its interest rate decision at 2:00 AM Beijing time on April 30, with the benchmark rate expected to remain in the 3.5% to 3.75% range. Market consensus is highly aligned, with only Governor Miran expected to dissent, favoring a 25 basis point cut.

The latest changes come from the inflation front. The Iran war and energy shocks continue to disrupt the outlook, with gasoline prices still above $4 and traffic through the Strait of Hormuz remaining heavily obstructed. Meanwhile, recent employment data has shown resilience, reducing the urgency for dovish committee members advocating for a prompt backstop to the labor market.

Fed officials generally expect the decline in inflation to be delayed by another full year. Market expectations for rate cuts have narrowed significantly. Deutsche Bank has withdrawn its previous forecast for a September cut, adjusting its baseline scenario to the Fed remaining "on hold indefinitely" near the neutral rate.

The core debate of this meeting centers on the statement's wording and the risk assessment in the press conference. The addition or removal of a single word in the forward guidance could send drastically different policy signals to the market. At the same time, with the Department of Justice ending its investigation into Powell and Kevin Warsh's path to Fed Chair nomination largely cleared, this meeting carries added historical significance.

Standing Pat is Consensus, Debate Shifts to 'Next Steps'

This FOMC meeting has no dot plot, and the interest rate decision itself holds almost no suspense. The focus is on whether the Fed remains willing to retain the policy hint that 'the next move is more likely a cut' or begins to acknowledge that risks have shifted to being two-sided.

According to Bank of America, the inflation outlook is as unclear now as it was during the March meeting. While the stock market trades as if the Iran war has ended, energy and shipping disruptions persist, and the transmission of the conflict to core inflation remains highly uncertain.

The employment side has not provided sufficient reason for the Fed to pivot dovish urgently. March data on non-farm payrolls, ADP employment, and initial jobless claims all indicate a resilient labor market, even showing some signs of improvement. This makes it harder for previously dovish members to continue emphasizing 'downside risks to employment' as the primary policy justification.

Doves Also Tighten, Urgency for Cuts Decreases

Before this meeting, the most notable change within the Fed was the increasingly hawkish rhetoric from previously dovish members.

In his speech last week, Waller not only emphasized the upside inflation risks from the Iran war but also mentioned labor supply shocks. He argued this could mean the economy needs 'almost no net new job creation' to maintain a stable unemployment rate. BofA believes Waller may still desire a rate cut this year, but the magnitude could be smaller and the timing later than previously expected.

Daly's stance went further. She stated that if policy remained unchanged for the year, it would provide a good constraint on inflation without being restrictive enough to harm the labor market. She also suggested the impact of the Iran war on inflation might be greater than its impact on growth. Daly's current baseline scenario has shifted to a flat rate path for the year.

Even Miran, the most dovish member on the FOMC, indicated he now favors three rate cuts this year instead of four, citing the worsening inflation mix since the beginning of the year. BofA suggests that if the April meeting had a dot plot, some members' 2026 rate expectations would likely have moved higher, and the risk of more 'dots' moving higher by June is increasing.

Statement Wording: One Word Difference, Vastly Different Signal

The biggest point of interest in this FOMC statement is whether the Fed will signal that the risks to the policy path have become 'two-sided.'

The current phrasing regarding 'additional adjustments' implies a dovish presumption that the next move is a rate cut. Changing this to 'any adjustments' or simply removing 'additional' would mean the direction of the next move is no longer presumed to be a cut, formally opening the policy path to a two-sided approach. The minutes from the March meeting showed that the number of members supporting a two-sided risk description increased from 'several' in January to 'some,' and the firmness of the language had strengthened.

Bank of America views this as a close call, near 50/50, but believes most members still favor maintaining the current forward guidance language. Deutsche Bank leans toward the view that substantive guidance changes will be postponed until June, when the committee will have more clarity on the Middle East situation, labor market stability, and inflation transmission channels, though the risks clearly tilt hawkish.

Additionally, one adjustment is anticipated in the statement: given the downward revision to Q4 GDP and weak consumer spending in Jan-Feb, the Fed might downgrade its description of economic activity from 'solid' to 'moderate.' However, BofA notes that this adjustment itself has a dovish hue, somewhat contradicting the committee's overall intention to send a hawkish signal to the market.

Press Conference: A Hawkish Stance from Powell is Imperative

If this is indeed Powell's last press conference as Chair, he will likely maintain a moderately hawkish stance.

According to BofA, Powell's core message will probably be that the Fed remains firmly on hold, and current policy is well-positioned to address risks to its dual mandate. With uncertainties still high, the Fed sees no reason to push back against market pricing of a flat rate path.

The most sensitive question at the press conference will be the threshold for rate hikes. If Powell reiterates that rate hikes are not the baseline scenario for a majority of the committee, the market might interpret this as a dovish signal. If he emphasizes the importance of completing the task of fighting inflation or points out that inflation has been above target for several years, it would be seen as a hawkish signal.

Notably, at the March press conference, 'inflation' was mentioned 67 times, while 'labor market/employment/unemployment' was mentioned only 40 times, clearly making inflation the heaviest weight on the policy scale. He is not expected to provide a quantitative threshold for rate hikes.

Regarding the Iran war, Powell is expected to acknowledge both the upside risks to inflation and the downside risks to growth and the labor market. But the market will focus on which side he leans towards. If his remarks resemble Daly's—that the war's impact on inflation is greater than on growth—the market might view it as very hawkish.

Focus: Are Rate Cuts Scuttled or Merely Delayed?

Nick Timiraos, known as the 'Fed whisperer,' wrote before the meeting that the April meeting marks a watershed for a deeper policy debate: how long can the Fed maintain its stance that 'the next move is more likely a cut than a hike.'

Timiraos noted that two years ago, Powell downplayed stagflation fears, saying he saw 'neither stagnation nor inflation.' But now, the energy shock from the war, combined with inflation still above the 2% target, makes the historical mirror of 1970s stagflation seem less distant.

He emphasized that the Fed is observing how the U.S. economy digests a fourth supply shock in five years, including the pandemic restart, the Russia-Ukraine conflict, tariff disruptions, and the Iran war. Each shock in isolation might be dismissed as a transitory event requiring no policy response, but their cumulative effect makes managing inflation expectations more challenging.

Timiraos believes the statement itself may be as important as the rate decision. If the Fed modifies the formal statement language to suggest rate cuts are essentially off the table, the market impact could be as significant as a policy action itself.

The Last Dance and the Handover

This meeting attracts more attention also because it could be Powell's last FOMC as Chair.

Powell's term as Fed Chair ends on May 15th. He has previously promised to serve as 'acting Chair' until his successor is confirmed. With the DOJ ceasing its investigation into matters related to Powell, the path for Kevin Warsh's Senate confirmation has become clearer.

UBS expects Kevin Warsh could be sworn in before the June 16-17 FOMC meeting. If this timeline materializes, the April meeting will represent the final complete policy communication window of the Powell era, and the market will be more focused on whether he leaves a policy starting point of 'lower-for-longer rates' for the next Chair.

Market Reaction: Tail Risks Beneath the Non-Event Surface

Views from Goldman Sachs' trading desk suggest the market broadly views this FOMC as a low-volatility event, but directional sensitivities exist across different assets.

On rates, Goldman analyst Brian Bingham expects no significant hawkish shift in inflation language in the statement, with Powell reiterating a wait-and-see approach. However, with only about 5 basis points of movement priced in through December, the threshold for a significant sell-off that prices in a material probability of rate hikes is high. If the baseline scenario deviates, the risk leans toward higher rates, fewer cuts, and a flatter curve.

On FX, Goldman trader Carlie Ladda believes a slightly hawkish Fed could prompt some dollar buying, but this is unlikely to form a sustained trend. The market remains more focused on the Iran situation, corporate earnings, and month-end factors. The trading desk leans toward selling the dollar on any rally.

On equities, Goldman's Vickie Chang points out that the main risk from the FOMC for stocks is if Powell more cautiously emphasizes the inflation risks from commodity price shocks, potentially dampening risk appetite. Risk assets are currently pricing in a significant discount for the conflict, and downside tail risks may be underestimated.