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The Fed held rates unchanged at 3.5–3.75%, but the decision exposed unusually sharp internal divisions, with four dissents reflecting growing uncertainty over inflation amid tariff risks and Middle East tensions. Separately, Chair Powell announced he will remain on the Fed’s Board after stepping down as chair, citing legal pressure from the Trump administration and concerns over institutional independence thus delaying an additional Fed appointment by Trump. Looking ahead, despite a leadership transition to Kevin Warsh, we expect policy rates to remain unchanged through CY26, with markets having fully priced out earlier expectations of multiple rate cuts.
Rates held steady as expected amid a challenging macro backdrop
While rates were held steady at 3.5–3.75% as largely expected, four of 12 members dissented—three objecting to retaining language signalling an easing bias, and one favouring an immediate rate cut. The split reflects rising uncertainty over the inflation outlook amid new supply shocks from tariffs and Middle East tensions. Over the last two months, headline inflation expectations have risen by >70bps even as core inflation expectations rose by only 20bps.
Powell to remain on Fed Board, ratchets up fight with Trump over independence
Chair Powell said he will remain on the Fed’s Board of Governors after stepping down as chair next month, citing unprecedented legal pressure from the Trump administration that he believes threatens the institution’s independence (a theme we highlighted even before Trump took office: The Fed is on a collision course with Trump). Powell’s chair term ends on 15 May, but his separate term as governor runs until early 2028. Traditionally, Fed chairs depart when successors take office, making Powell’s decision a significant break from precedent. This decision delays any additional Fed board governor appointment by Trump.
Policy outlook: We expect rates to remain unchanged in CY26
While Kevin Warsh is expected to take over as chair before the next Fed meeting, we do not expect a material shift in the policy‑rate trajectory. The markets have priced out rate cuts post the US-Iran war started vs. expectations of at least 2 cuts earlier. Our view, long before the war started, was that the potential for rate cuts was limited vs. what the market was pricing (See No clear path to cuts and we are at ‘neutral’ now) as inflation was elevated even earlier. The Fed still maintains an easing bias given risks to growth, labor markets and financial stability.
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