Powell Takes a Stand

The Federal Reserve kept rates steady on Wednesday and the statement largely unchanged, but things were quite unusual underneath the surface. There were four dissents, Fed Chair Jerome Powell intends to stay on the board after his chairmanship ends next month, and he gave a harsh rebuke against continued political attacks that challenge Fed independence. While I am happy to see fire from this Fed, the question I have to ask, does it come too late?

With the markets pricing in a zero percent chance of a move, today’s FOMC was never about rates; instead, it was about the future of the Fed itself. While the Fed continues to signal a small bias toward additional easing, three dissents sought to shift toward a more neutral tone, with another dissent that preferred to lower rates at this meeting – a level of dissents not seen since 1992. 

With Powell staying on, something we haven’t seen from a chair since 1948, that one dissent seeking lower rates will be gone, and I believe we will not see any calls for lower rates at the next meeting. The Iran war is tinder to an already simmering inflation fire, and this Fed likely should have shifted its stance to neutral today. Markets had expected Kevin Warsh to come in with a bias toward easing; instead, he will be inheriting a divided Fed with the former boss still in the room, a difficult position to inherit. 

All eyes will be on the Kevin Warsh Fed, which he is likely to steer to less communication, a smaller balance sheet, and lower rates. Standing in the face of change will be a divided Fed on rate policy, likely one where political attacks continue seeking to fire Lisa Cook and board member Powell, and a clear-as-mud picture of inflation. While Powell has suggested he will retain a low profile, I suspect we will hear more from Powell than he currently intends. For now, farewell Chair Powell and good luck Kevin Warsh. 

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