This week’s Federal Reserve meeting is set to be Jerome H. Powell’s last as chairman of the central bank. But the “wait and see” policy path he carefully carved out amid resurgent inflation risks is likely to remain intact long after he leaves the top job.
On Wednesday morning, President Trump’s handpicked successor, Kevin M. Warsh, is expected to take a significant step toward becoming the next Fed chairman when Republicans on the Senate Banking Committee clear him for a full Senate vote. Hours later, the Fed will announce its latest interest rate decision, followed by what appears to be Mr. Powell’s last press conference as chairman.
However, new leadership at the Fed will not automatically initiate a sea change in the outlook for interest rates. Since December, officials have kept them in a range of 3.5 percent to 3.75 percent, to Mr. Trump’s regret. The President wants significantly lower borrowing costs and has made it clear that he expects Mr. Warsh delivers them.
But Fed policymakers reckon there is no rush to restart rate cuts, and Mr Warsh has said he did not promise Mr Trump to ease policy to get the job, even as Senate Democrats have questioned whether he would serve as the president’s “puppet”. On Wednesday, the Fed is generally expected to keep interest rates steady again. In fact, traders in the financial markets who follow the path of rates do not predict any turn towards cuts at all this year.
“The path to cutting is one that’s much more fraught now than it looked a few months ago,” said Nathan Sheets, chief economist at Citi and a former Treasury official.
The Fed’s caution about interest rate cuts crystallized in the wake of the war with Iran, which is pushing inflation further from the central bank’s 2 percent target while raising the specter of slower economic growth.
A roughly 50 percent rise in oil prices since the start of the war on Feb. 28 has rippled through the economy, raising gasoline costs, air fares and shipping fees. Rising fertilizer prices have raised concerns about rising grocery bills, which would add another expense to Americans who have faced higher prices in the past year because of Mr. Trump’s tariffs. The latest report from the Consumer Price Index showed that annual inflation was 3.3 percent in March, almost a full percentage point higher than the pace in February.
The longer energy prices remain high, “the greater the chances are that higher inflation will be embedded across a wide range of goods and services, various supply chain effects will begin to emerge, and real activity and employment will begin to slow,” Christopher J. Waller, a Fed governor who was in the process of replacing Mr. Powell, said in a speech this month.
Just a handful of months ago, Mr. Waller was so worried about the labor market that he voted for a quarter-point rate cut in January. Monthly job growth has started to pick up again and the unemployment rate has remained around 4.3 percent, indicating a more stable situation.
Against this background, even some of Mr. Trump’s biggest supporters changed their tune on interest rate cuts. Treasury Secretary Scott Bessent said this month that the Fed should “wait and see” before lowering borrowing costs. Stephen I. Miran, who consistently called for aggressive rate cuts after Mr. Trump appointed him as Fed governor last year, has approved a slower pace of tapering in light of what he described as “a little bit less favorable” inflation dynamics.
“Energy development has changed the distribution of risks,” he said in public remarks recently. “They have increased the risk of higher inflation.”
For Jon Faust, a fellow at the Center for Financial Economics at Johns Hopkins University and a former senior adviser to Mr. Powell, those comments suggest that “everyone except Trump is resigned, regardless of who’s president, to an ongoing hold until things clear something up.”
Support for cuts is unlikely to grow unless the labor market takes a turn and begins to deteriorate more significantly. Politicians also want tangible evidence that inflation from both the war and last year’s tariffs has abated. Some officials seem willing to acknowledge that the Fed is just as likely to have to consider rate hikes, though no one yet believes that is the most likely outcome.
As chairman, Mr. Warsh have had an influence on the course debate, but not the last word. Decisions are made by a 12-person committee, which also includes the six other members of the board, the president of the Federal Reserve Bank of New York, and a rotating set of four presidents from the 12 regional banks.
Among those who could still get a vote is Mr Powell.
Just days before the Fed’s policy meeting was set to begin on Tuesday, it was not entirely clear whether he would step down as chairman when his term ends on May 15. A criminal investigation into Mr Powell and the central bank had delayed Senate confirmation of Mr Warsh. Mr. Powell had promised to remain chairman temporarily if Mr. Warsh was not confirmed in time.
But on Friday, the ground moved. In a twist, the Justice Department dropped its investigation into renovations at the Fed’s Washington headquarters, but kept open the possibility of reopening it at any time. Late on Sunday, Senator Thom Tillis of North Carolina, a key Republican on the Banking Committee, said federal prosecutors had given him sufficient assurances that Mr. Powell’s legal threats were over.
Mr. Powell still faces a big decision about whether to stay on as governor, which he can do until January 2028. That would prevent Mr. Trump in filling the seat with someone more amenable to his desires to lower interest rates and gain more control over the central bank.
Mr. Powell has said he would not leave the board until the criminal investigation was “well and truly over, with transparency and finality.” He added that his decision would depend on what he believed was “best for the institution and for the people we serve.”
Mr. Tillis suggested Sunday that the Justice Department could still appeal a federal judge’s ruling that voided the subpoenas against the Fed. He said such a move would not be about prosecuting Mr. Powell, but about defending prosecutors’ power to issue subpoenas. However, an appeal is likely to encourage Mr Powell to stay.
It could mean an awkward transition period for Mr. Warsh, who wants to pursue sweeping changes to the way the Fed operates, including the data it prefers to make interest rate decisions, how it communicates any policy pivots and its footprint in financial markets.
Mr. Warsh’s ability to implement these changes would require broad internal support, something he would have to build while managing Mr. Trump’s anger if he didn’t follow the policies the president wanted.
“I don’t think he gets much of a honeymoon,” Mr. Faust said. “He’ll be in the firing line Day 1.”
