With Powell's reappointment, the number of dissenting votes surged, and Warsh encountered resistance even before taking office: it will not be easy to push the Federal Reserve to cut interest rates as desired.
The divisions within the Federal Reserve's policymaking body over the path of interest rates were fully exposed at the final meeting chaired by current Chair Powell. Three officials cast rare dissenting votes against the policy statement, explicitly opposing the continued suggestion of future rate cuts.
Meanwhile, Powell confirmed that he will remain as a governor after his term as chair ends in May, a decision that further narrows the room for rate cuts in the short term. Incoming Chair Kevin Warsh is set to take over a policy committee increasingly resistant to rate cuts, while his previously signaled stance supporting potential cuts is now facing practical constraints from his colleagues.
At the April monetary policy meeting, the Federal Reserve kept the benchmark interest rate unchanged within the target range of 3.5% to 3.75%. Four officials expressed divergent views—three members opposed retaining language suggesting a bias toward rate cuts, while Governor Milan urged a 25-basis-point cut.
On April 21, Trump told CNBC in an interview that he would be 'very disappointed' if Warsh does not immediately cut rates upon taking office. However, Kevin Flanagan, head of investment strategy at WisdomTree, pointed out that expecting Warsh to cut rates immediately after assuming office is unrealistic. 'It will depend on data performance over the next six weeks or even longer to convince these three dissenting officials to change their minds and support rate cuts.'
The public disclosure of divisions within the policy committee stems from concerns about stubborn inflation and surging energy prices. Since the three consecutive rate cuts last fall, the Fed’s post-meeting statements have consistently included the phrase 'further rate cuts may ultimately be appropriate.' However, at this week’s meeting, three officials dissented from this wording, wanting instead to signal that the next move could just as likely be a rate hike.
Powell told reporters after the meeting, 'The core stance is shifting toward a more neutral position, which is exactly what the market is currently reflecting.' He also noted that most officials are not yet ready to alter the phrasing, but the emergence of dissenting votes indicates that those advocating for a shift are becoming increasingly impatient.
Priya Misra, portfolio manager at J.P. Morgan Asset Management, believes this vote 'is not only a signal to the incoming Warsh, but also a declaration to the markets and government that the Federal Open Market Committee (FOMC) is a credible and independent democratic institution.' She stated frankly, 'If Warsh wants to cut rates, he must first persuade his colleagues.'
Bob Michele, chief investment officer and global head of fixed income at JPMorgan Asset Management, noted in an interview that since 1992, the Federal Open Market Committee has never experienced a four-way split. He interpreted this as 'less of a message to Powell and more of a warning to the incoming Fed chair: ‘We may cast dissenting votes, so be prepared.’'
Milan, the sole Fed governor appointed during Trump’s second term thus far, has cast dissenting votes at every meeting since taking office last fall, consistently advocating for rate cuts more urgently than his colleagues. Once Warsh’s nomination is approved, he will assume Milan’s seat as a governor.
Energy price shocks and inflationary concerns are squeezing the space for rate cuts.
Even among policymakers who agreed to retain the language indicating a bias toward rate cuts, few were eager to act in the near term. The impact of the Middle East conflict on the U.S. economy has become a central concern, with several officials needing more time to assess this variable. Some officials worry that a sustained spike in energy prices could further exacerbate already high inflation.
Former Cleveland Fed President Mester analyzed: 'The conflict is ongoing, oil prices remain elevated, and various inflation metrics are showing signs of upward pressure; meanwhile, stronger-than-expected data from the real economy has emerged.' She added: 'Therefore, if you previously thought that the next move might be a rate cut due to positive progress on inflation or concerns about the labor market, many of those reasons for cutting rates have now evaporated.'
Michele also highlighted changes in the wording around inflation. He noted that the Fed's statement had shifted its description of inflation from 'somewhat high' to 'elevated,' which 'indicates growing concerns about price levels and the potential spillover effects of oil prices.' In his view, the Fed’s policy direction has shifted, adopting a stance that is 'not entirely hawkish but leans more hawkish than before.'
Powell’s decision to remain limits scope for personnel adjustments
Powell’s decision to remain as a governor has added another layer of resistance to near-term rate cuts. The outgoing chair told reporters in Washington: 'After my term as chair ends on May 15, I will continue serving as a governor for an undetermined period.'
He explained that this decision stemmed from concerns over 'legal attacks targeting the Fed, which threaten our ability to conduct monetary policy without political considerations.' He also stated that he plans to keep a low profile and does not intend to become a major opposing force against the new chair.
Nevertheless, Powell’s continued presence at least restricts Trump's ability to install loyalists on the Board of Governors. Former Philadelphia Fed President Harker commented: 'Powell’s announcement that he will stay effectively eliminates any notion of the Fed cutting rates in the short term. The policy committee has clearly entered a wait-and-see consolidation phase.'
Just hours before the meeting where this policy divergence was made public, the Senate Banking Committee advanced the nomination process for Warsh. The previous deadlock stemmed from a hold by a Republican senator from North Carolina, who opposed a Trump-led criminal investigation into Powell. That investigation focused on Powell’s statements to Congress regarding the renovation of the Fed’s headquarters, which Powell has denied involved any wrongdoing. The U.S. Department of Justice decided last week to drop the probe, which has since been taken over by the Fed’s inspector general.
In the long term, Warsh may still find common ground with most policymakers, believing that the current interest rate level is at a neutral position, while sudden shifts in economic fundamentals could compel the policy committee to act. But until the data provides clear signals, he faces a committee whose stance against rate cuts is hardening and whose internal divisions have already surfaced publicly.
Editor/KOKO