Powell's Farewell Night: Wall Street Hears a More Hawkish Fed

Original Title: "Powell Exits, Oil Prices Take Center Stage, Hawkish Tone Intensifies Across the Board — Wall Street Reacts to the Fed's Decision"

Original Author: Zhao Ying

Original Source: Wall Street News

The Federal Reserve held its ground, yet Wall Street heard a louder hawkish echo. Three dissenting votes against retaining an accommodative bias, the inflationary pressure from surging oil prices, and Chairman Powell's tenure winding down, have collectively pushed the market from trading on rate cuts towards pricing in a more complex risk of rate hikes.

According to the Zhui Feng trading desk, at the FOMC meeting on April 29, the Fed held the federal funds rate target range unchanged at 3.50%-3.75%. Post-meeting analyses from Goldman Sachs, Bank of America, JPMorgan Chase, and HSBC all point to the same conclusion: the significant factor wasn't the rate decision itself, but the widening divergence in statement language, signaling a loosening consensus within the committee on the policy direction.

The deteriorating situation in Iran made oil prices another major theme of the day. Bank of America noted that the 2-year Treasury yield rose by 10 basis points that day, with only about 3 basis points coming after the Fed's decision, while the remaining 7 basis points were primarily driven by Brent crude's single-day surge of 8% to $120/barrel. JPMorgan Chase also believes that the Iranian situation and the risk surrounding the Strait of Hormuz boosted energy prices, directly compressing the Fed's room for easing.

The power transition further amplified policy uncertainty. Powell confirmed this would be his last FOMC meeting as Fed Chair, stating he would remain on the committee as a standard governor after his chairmanship ends, though his tenure length is undecided. Meanwhile, the Senate Banking Committee has advanced Kevin Warsh's nomination for Fed Chair. An era of monetary policy has officially ended, and the policy style and communication framework of the successor are becoming the new focus for markets.

Three Dissenting Votes, the Accommodative Bias No Longer Solid

The most watched signal from this meeting was the split within the FOMC over the statement's wording.

Goldman Sachs economist David Mericle noted that the three committee members — Hammack, Kashkari, and Logan — opposed the language implying an accommodative bias in the statement, a result that surprised Goldman Sachs. Concurrently, Miran supported a rate cut, aligning with Goldman's earlier assessment.

The controversy centered on the phrase regarding the "timing of additional adjustments." In the market context, this wording is seen as a signal that keeps the door open for future rate cuts. The opposition by the three members to retaining this phrasing indicates that some policymakers are no longer willing to send a one-sided accommodative signal to the market.

Powell acknowledged in the press conference that there had been "lively discussions" within the committee regarding policy guidance. He stated that the number of members favoring a shift to more neutral guidance had increased compared to March, and the FOMC's central stance was moving towards a "more neutral" rate outlook, though a majority felt the timing wasn't right yet. He even suggested that a wording adjustment could "come as early as the next meeting" — scheduled for June 16-17.

HSBC also emphasized that the essence of this divergence was that the policy direction was no longer one-sided. While the three members supported keeping rates unchanged, they explicitly opposed retaining the accommodative bias, effectively signaling to the market that the next move could be either a cut or a hike.

"Rate Hikes" Return to Pricing, the Bar for Cuts is Raised

The consensus on Wall Street is that the Fed hasn't officially pivoted to rate hikes, but the long-dormant word "hikes" has formally re-entered the market's radar.

Bank of America stated that following the slightly hawkish FOMC meeting, coupled with record high oil prices, the market has now priced in about 10 basis points of rate hikes over the next 12 months. The bank noted this differs from the 2022 hiking cycle because the current energy shock also exerts downward pressure on growth, a point Powell himself hinted at during the press conference.

JPMorgan Chase's interpretation was more hawkish. Its natural language processing model showed that the hawkishness scores for both the statement and Powell's press conference were the highest since June 2025. The bank stated that money market pricing had rapidly shifted from "nearly a full rate cut by end of 2027" to "nearly a 50% probability of a hike by early 2027."

Goldman Sachs maintained a more cautious stance. The firm still predicts the Fed might cut rates in September and December but believes the bar for cuts has been raised significantly without a clear weakening of the labor market. Goldman stated that the risk of an extended pause in rates is rising, though it remains highly skeptical of the possibility of rate hikes.

HSBC offered the most hawkish forecast. The bank expects the Fed will not cut rates in either 2026 or 2027. HSBC believes that unless core PCE inflation falls below 3%, or even 2.5%, rate cuts are almost impossible, and its own forecast shows core PCE inflation staying above 3% through end-2026 and above 2.5% through end-2027.

Oil Prices are the Main Character, Iranian Situation Drives Pricing Logic

Unlike past FOMC meetings where the statement dominated market reaction, energy prices became the core variable for interest rate markets on this day.

Bank of America noted that of the 10 basis point rise in the 2-year Treasury yield, only about 3 basis points could be attributed to the Fed's decision itself, with the majority stemming from Brent crude oil rising to $120/barrel. The bank believes that the main driver of the Fed's outlook is currently the Iranian situation and oil prices, not a simple policy reaction function.

JPMorgan Chase also attributed the rise in front-end yields and the flattening of the yield curve to the deteriorating situation in the Middle East and the risks in the Strait of Hormuz. Rising oil prices not only boost inflation expectations but also make it harder for the Fed to signal easing.

Powell explicitly mentioned in his press conference that, with high uncertainty surrounding war and energy prices, the majority of committee members saw no need to adjust policy guidance. JPMorgan stated that Powell set prerequisites for potential rate cuts, namely needing to see stabilization in energy prices and progress on tariff issues.

Goldman Sachs believes that even if the geopolitical conflict ends eventually, some FOMC members might remain cautious about cutting rates while inflation is still closer to 3% than 2%. Even if the overshoot is primarily due to tariffs and energy price pass-through, policy easing may not be swift to arrive.

Powell Takes a Bow, Warsh Takes the Baton, Introducing New Variables

This meeting also marked the end of an era for Chair Powell.

Bank of America noted this was Powell's last FOMC meeting as Fed Chair. Goldman Sachs' report mentioned that Powell stated he would remain on the FOMC as a standard governor after his chairmanship ends on May 15, with the length of his remaining tenure undecided.

Regarding his reason for staying, Goldman cited Powell saying he was waiting for related investigations to conclude in a transparent and definitive manner and would leave when he deems it appropriate. JPMorgan and HSBC also mentioned that Powell intends to maintain a low profile and will not hinder the FOMC's operations under Warsh's leadership.

The progress of Warsh's nomination has become a market focus. JPMorgan noted that the Senate Banking Committee has voted along party lines to advance his nomination. HSBC pointed out that the full Senate vote is pending, but if proceedings go smoothly, Warsh could be officially sworn in before the June meeting.

HSBC believes Warsh could bring systemic changes to the policy communication framework. Its rates strategist noted that Warsh has previously expressed skepticism about the Fed's "dot plot" interest rate projection mechanism. If forward guidance is weakened going forward, bond market volatility could increase, and term premiums on long-term rates could face upward pressure.

Rate Volatility Coexists with Policy Uncertainty

For fixed-income investors, the message from this meeting was not monolithic. Short-end yields were pressured by oil prices and hawkish pricing, pushing back expectations for cuts, but hikes have not yet become the consensus base case across investment banks.

Bank of America believes that for the investment-grade bond market, the current rise in yields has partially hedged the impact of interest rate volatility. As implied rate volatility remains below its peak in March this year, the technical picture for investment-grade bonds still has temporary support.

JPMorgan Chase cautioned that pressure on short-end yields, expensive valuations on intermediate-term Treasuries, and the policy uncertainty from the leadership change combined mean that the rates market is entering a more complex phase of trading.

HSBC maintains its "maximum bullish" multi-asset stance, with a focus on US stocks. The bank stated that despite the hawkish repricing of rate expectations, risk assets performed strongly in April, and the optimistic sentiment around the AI industry's earnings remains an important narrative in multi-asset markets.

Overall, Wall Street's conclusion from this FOMC meeting is: The Fed didn't change rates, but it changed the market's probability distribution for the next move. Powell exits, oil prices take center stage, and Warsh is set to take over. Investors are no longer facing a simple timeline for rate cuts, but a new rate environment driven jointly by inflation, energy, employment, and policy communication.