FOMC Watch - The dots move up, and Powell will be one of them
The Fed left rates unchanged as expected. The major headline was that four FOMC members dissented, a number not seen since the early 1990s. This made the final Powell FOMC meeting his most divided, and gives an interesting starting point for his successor, who was already expected to have some trouble building consensus behind him.
As usual, Miran dissented in favour of a 25bps reduction in rates, while Hammack, Kashkari and Logan dissented over 'the inclusion of an easing bias in the statement at this time.' The particular statement that led to dissent is 'In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.' While it seems neutral at first sight, the 'additional' has largely been interpreted as additional easing, since that has been the recent trajectory. The statement remained unchanged, but it seems that the three dissenters were looking for more explicit two-sided description of the future interest rate decisions. Powell also confirmed there were non-voters that preferred the language change. Still, the majority decided to keep the language intact, meaning the easing bias is still present in the statement. Changing the language would have been seen as a strong hawkish move, and this being Powell's last meeting, he might have also pushed to refrain from changing the trajectory beyond the end of his tenure. When asked whether the language will still be present in the next meeting, he gave room for his successor.
In a much-anticipated reveal, Powell has confirmed that he will remain on the board for some time, at least until the Justice Department investigation is 'well and truly over.' This means that Stephen Miran will be out once Kevin Warsh is confirmed, and that, for now, there will be no 'Trump majority' on the federal reserve board. Powell stated that he’d keep a low profile, trying to diffuse any concerns of him becoming a shadow chair. Still, he said his approach will be to support the chair, as he and his colleagues always have, but 'when you can't, you can't'.
On inflation, he reiterated that tariff inflation still needs to go away, and he was cautious of the energy shock. He noted that they would have to see the backside of energy (i.e. being beyond the peak) and the end of tariff-related inflation (which he expects to happen 'pretty soon'), before rates can come down. They are carefully keeping track of the oil shock, and he expects that it will take 3 to 4 months for the oil shock to show up in a weakening of consumption data. He noted that things could look very different by the June meeting.
With Kevin Warsh on track to be confirmed as Powell's successor, we got only limited forward guidance. A large part of the press conference was spent on central bank independence, and the future of the FOMC, in terms of policy, people and communication. Powell defended independence vigorously but refrained from making any real statements on his successor, changes in Fed communication or future policy.
The Fed's resolve to keep rates at their current level seems to have only strengthened. The centre of the committee is moving towards a more neutral place, but they are firmly in wait-and-see mode. Even changing the language was seen as too much of a signal at this point. Nobody is calling for a hike right now, they still feel well positioned. We see no reason to adjust our Fed call on the basis of this meeting, and still see the Fed holding rates steady until the end of the year, where some disinflation and weakness in the labour market will provide a reason to moderately ease, starting with 25bps in December, and another 25bps per quarter, arriving at a 2.75-3.00% bandwidth, the lower end of neutral, by June. Thank you, Chair Powell, we won't see you next time.