Tonight, Powell's "Last FOMC" Meeting: Likely to Hold Steady, but Hawkish Tone Set to Intensify

Original Author: Zhao Ying

Original Source: Wall Street CN

The outcome of the Fed's April FOMC meeting is almost a foregone conclusion—interest rates will remain unchanged. However, the real focus of this meeting lies in the signals that will be released at what could be Powell's last policy meeting as Chair, and whether the committee will formally convey a hawkish stance 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. The benchmark rate is expected to remain unchanged in the range of 3.5% to 3.75%. Market consensus is highly aligned, with only Governor Miran expected to dissent, favoring a 25 basis point cut.

The latest changes stem from the inflation front. The conflict with Iran and associated energy shocks continue to cloud the outlook. Gasoline prices remain above $4, and traffic through the Strait of Hormuz is still significantly disrupted. Meanwhile, recent employment data has shown resilience, reducing the urgency for dovish committee members to push for support in the labor market.

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 Deutsche Bank has withdrawn its previous forecast for a rate cut in September, adjusting its baseline scenario to the Fed holding rates near neutral "indefinitely."

The core debate of this meeting centers on the wording of the statement and the characterization of risks in the press conference. The addition or deletion of a single word in the forward guidance could send vastly different policy signals to the market. At the same time, with the Department of Justice ending its investigation into Powell, Kevin Warsh's path to nomination as Fed Chair is largely clear, adding historical significance to this meeting.

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 if it will begin to acknowledge that risks have become two-sided.

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

The employment side hasn't provided enough reason for the Fed to pivot dovish quickly. March data on nonfarm payrolls, ADP employment, and initial jobless claims all point to 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 their primary policy justification.

Doves Also Tighten, Urgency for Cuts Declines

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

In a speech last week, Waller not only emphasized the upside inflation risks from the Iran conflict but also mentioned labor supply shocks. He argued this means the economy might need "almost no net new job gains" to keep the unemployment rate stable. BofA believes Waller may still hope for 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 maintaining current policy for the entire year would provide a good constraint on inflation without being restrictive enough to harm the labor market. She also believes the impact of the Iran conflict on inflation is potentially 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 of the FOMC, indicated he now favors three rate cuts this year instead of four, citing the worse inflation data since the start of the year. BofA suggests that if the April meeting had a dot plot, some members' 2026 rate projections would already be higher, and the risk of more "dots" moving higher is still increasing by June.

Statement Wording: One Word Difference, Vastly Different Signal

The biggest potential change in this FOMC statement is whether the Fed will signal that risks to the policy path have become "two-sided."

The current phrasing regarding "additional adjustments" implicitly sets a dovish premise that the next move is a cut. Changing it to "any adjustments" or simply deleting "additional" would signal that the direction of the next move is no longer pre-set towards cuts, officially opening the policy path to either direction. The minutes from the March meeting showed that the number of members favoring adopting two-sided risk language increased from "several" in January to "some," and the phrasing was more definitive.

Bank of America sees this as a close-to-50-50 call, but believes most members still prefer maintaining the current forward guidance language. Deutsche Bank leans towards the view that substantive guidance changes will be delayed until June, when the committee will have more clarity on the Middle East situation, labor market stability, and inflation transmission channels, but the risk is clearly tilted towards hawkishness.

Additionally, one adjustment is expected in the statement: given the downward revision to Q4 GDP and weak consumer spending in January and February, the Fed may downgrade its description of economic activity from "solid" to "moderate." However, BofA notes that this adjustment is inherently dovish, contradicting the committee's overall intention to send a hawkish signal to the market.

Press Conference: A Hawkish Stance from Powell is Inevitable

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

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

The most sensitive question during the press conference will be the threshold for rate hikes. If Powell reiterates that rate hikes are not the base case for the 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 notes that inflation has been above target for 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 conflict, Powell is expected to acknowledge both the upside risks to inflation and the downside risks to growth and the labor market. However, the market will focus on which side he leans towards. If his statements echo Daly's – that the conflict's impact on inflation is greater than on growth – the market will likely view it as very hawkish.

Focus on Whether Cuts are Shelved or Merely Delayed

Nick Timiraos, often called the "Fed's New Mouthpiece," wrote before the meeting that the April meeting marks a node 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 concerns, stating he saw "neither stagflation nor inflation." But now, the energy shock from the conflict, combined with inflation still above the 2% target, makes the historical parallel of 1970s stagflation less distant than before.

He emphasized that the Fed is observing how the U.S. economy digests its fourth supply shock in five years, including the pandemic restart, the Russia-Ukraine conflict, tariff disputes, and the Iran conflict. Each shock individually might be explained away as an event requiring no policy response, but the cumulative effect makes managing inflation expectations more challenging.

Timiraos believes the statement itself could be as important as the rate decision itself. If the Fed modifies the formal statement wording to imply that rate cuts are essentially off the table, the market impact could be equivalent to a policy action.

The Last Dance and the Handover

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

Powell's term as Fed Chair expires on May 15. He previously committed to serving as "temporary Chair" until a successor is confirmed. With the DOJ ceasing its investigation into matters related to Powell, Kevin Warsh's path to Senate confirmation appears clearer.

UBS expects Kevin Warsh could be sworn in before the June 16-17 FOMC meeting. If this timeline holds, the April meeting will serve as the last complete policy communication window of the Powell era, and the market will pay more attention to whether it leaves a policy starting point of "no cuts for longer" for the next Chair.

Market Reaction: Tail Risks Beneath a Non-Event Veneer

Views from the Goldman Sachs trading desk suggest the market broadly views this FOMC as a low-volatility event, but different assets remain sensitive to directional cues.

On rates, Goldman analyst Brian Bingham expects no significant hawkish turn in inflation language in the statement, with Powell reiterating a "wait-and-see" approach. However, with only about 5 bps of movement priced in through December, the bar for a significant sell-off and pricing in actual rate hike probabilities is high. If the baseline scenario deviates, the risk is more likely tilted towards higher rates, fewer cuts, and a flatter curve.

On FX, Goldman trader Carlie Ladda believes a slightly hawkish Fed could generate some USD buying interest, but a sustained rally is unlikely. The market remains more focused on the Iran situation, corporate earnings, and month-end factors. The desk leans towards selling USD on rallies.

On equities, Goldman's Vickie Chang notes that the main risk from the FOMC for stocks is that a more cautious Powell emphasizing inflation risks from commodity price shocks could dampen risk appetite. Current risk assets have largely priced in a de-escalation of the conflict, and downside tail risks might be underestimated.