Powell Era Draws to a Close With Fed Expected To Hold Rates Steady

Federal Reserve policymakers began their two-day meeting on interest rate policy Tuesday, marking the final rate decision before Fed Chair Jerome Powell's term expires May 15.

Powell and the other members of the Federal Open Market Committee will cast their votes Wednesday, with the majority of the 12 voters expected to support leaving the benchmark rate unchanged at its current range of 3.5% to 3.75%.

At least one dissent is certain, with Fed Gov. Stephen Miran adamantly favoring further cuts. Miran has dissented at each meeting since President Donald Trump appointed him last year, always in favor of cutting rates more than the majority.

Although Trump has pushed the Fed for dramatically lower interest rates, the outlook for further rate cuts this year has dimmed significantly following the war with Iran, which sent oil prices soaring and renewed fears of inflation.

Financial markets now project a 69% probability that the Fed's benchmark interest rate will be the same in December as it is today, according to CME FedWatch. It suggests investors believe inflation will remain hot enough to discourage any Fed rate cuts this year, even after Trump nominee Kevin Warsh were to take over as chair.

"Given our current economic environment, the Federal Reserve will close the book on rate cuts in 2026," predicts Bankrate Financial Analyst Stephen Kates. "Inflation was already simmering before the conflict-induced oil shock, so even when energy prices return to normal, it is not clear that inflation will move back toward the Fed’s 2% target."

With the Fed on pause for the foreseeable future, the easing of geopolitical tensions may be more crucial for mortgage rates than any monetary policy decisions, says Realtor.com® Chief Economist Danielle Hale.

"As the ceasefire in the Middle East holds, interest rates and mortgage rates have begun to move lower," says Hale. "Despite the key decisions and upcoming leadership transition for the Fed, geopolitics is likely to be the bigger driver of mortgage rates in the near-term. For buyers and sellers hoping for favorable financing while making a move, a reduction in tension is likely to result in lower rates."

The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the job market, in line with the central bank's dual mandate of price stability and maximum employment. Although the Fed does not control mortgage rates directly, those rates move in response to the outlook for Fed policy.

Powell to decide whether to remain on FOMC

The lack of policy action at this week's meeting will shift attention toward the ongoing chairmanship transition and Powell's legacy, says Kates.

Powell was appointed to lead the Fed by Trump himself in 2017. But he has faced the president's wrath during his second term for refusing to dramatically slash interest rates. Powell has emphasized the importance of Fed independence during his tenure, standing firm in the face of Trump's threats to fire, sue, and even criminally prosecute him.

The nomination of Warsh, a former Fed governor, is expected to clear the Senate shortly, likely putting him on track to take over before the next FOMC meeting in June.

But after unprecedented political tensions engulfed the strenuously neutral Fed, including Trump's attempt to fire a governor and a thinly predicated Department of Justice criminal probe of Powell himself, it remains to be seen whether a Warsh Fed will lower the temperature while preserving credibility with markets and consumers.

One key question hangs above this week's meeting: whether Powell will resign from the Fed's board of governors, as is traditional for outgoing chairs, or remain on as a regular voting member.

If he chooses, Powell could remain on the board until 2028. That would force Trump to use Miran's seat to install Warsh, limiting the president's influence over the voting composition of the FOMC.

"Although Powell could stay on as a governor even after stepping down as chair, this would be unusual," says Kates.

Markets turn to Warsh for guidance

Because Warsh is expected to take over as chair shortly, Powell's comments at the traditional post-vote press conference Wednesday are less likely to move markets.

Instead, investors have begun to speculate about life under a Warsh Fed—although Trump's new chairman will not be able to dictate interest rate policy, and will have only one vote on the FOMC.

“Kevin Warsh may gradually shape internal operations to his liking, but his ideas are not likely to be reflected in regular policy or communication procedures immediately," predicts Kates. "Warsh is a single voting member on a board of 12. The board may offer him deference as chair, but he will still need to build consensus for his policy views to take hold."

At his confirmation hearing last week, Warsh faced tough questions about his personal wealth, which would make him the richest Fed chair in history by far.

Warsh also insisted that he would uphold Fed independence, saying that Trump had not dictated future rate moves as a condition of offering the job.

The economist Hale notes that Warsh's testimony also included hints that he could try to shift the way that the Fed operates, without losing sight of its dual mandate.

"For one, Warsh questioned whether forward guidance was helpful, suggesting that publishing forecasts as the Fed does in its summary of economic projections may cause the Fed to 'hold on to those forecasts longer than they should,'" says Hale.

Warsh also seemed to question the Fed's 2% inflation target—a goal that dates back to 2012 but has little formal basis as an "ideal" level of inflation.

Most significantly, Warsh has argued that shrinking the Fed's balance sheet would allow the central bank to cut interest rates without triggering inflation. It's an untested theory, and relies on the balance between two opposing monetary effects: quantitative tightening from asset sales and loosening from lower short-term interest rates.

"The key question for the housing market is how this would affect long-term interest rates including the 10-year yield and mortgage rates," says Hale.