This week’s Federal Reserve meeting will be Jerome H. Powell’s last as chairman of the central bank. But the “wait and see” political path he carefully carved amid risks of resurgent inflation 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 chairman of the Federal Reserve when Republicans on the Senate Banking Committee approve him for a full Senate vote. Hours later, the Federal Reserve will announce its latest rate decision, followed by what appears to be Powell’s last news conference as chairman.
However, new leadership at the Federal Reserve will not automatically cause a radical change in the outlook for interest rates. Since December, officials have kept them in a range of between 3.5 and 3.75 percent, much to Trump’s chagrin. The president wants substantially lower borrowing costs and has made clear that he expects Warsh to deliver.
But Fed policymakers project no urgency to restart rate cuts, and Warsh has said he did not promise Trump to ease policy to get the job, even as Senate Democrats have questioned whether he would serve as the president’s “sock puppet.” The Federal Reserve on Wednesday is widely expected to keep rates steady again. In fact, financial market traders who track rates predict there will be no shift toward cuts this year.
“The path to cuts is much more complicated now than it seemed a few months ago,” said Nathan Sheets, chief economist at Citi and former Treasury Department official.
The Federal Reserve’s caution about rate cuts crystallized in the wake of the war with Iran, which is pushing inflation even further away 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, driving up gasoline costs, airfares and shipping costs. Rising fertilizer prices have raised concerns about rising grocery bills, which would add yet another expense for Americans who have faced higher prices over the past year due to Trump’s tariffs. The latest Consumer Price Index report showed that annual inflation was 3.3 percent in March, almost a percentage point higher than the pace in February.
The longer energy prices remain elevated, “the greater the chance that higher inflation will become embedded in 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, the Federal Reserve governor who was in the running to replace Powell, said in a speech this month.
Just a few months ago, Waller was so concerned about the labor market that he voted for a quarter-point rate cut in January. Monthly employment growth has started to pick up again and the unemployment rate has stabilized around 4.3 percent, indicating a more stable situation.
Against this backdrop, even some of Trump’s biggest supporters have changed their minds on rate cuts. Treasury Secretary Scott Bessent said this month that the Federal Reserve should “wait and see” before reducing borrowing costs. Stephen I. Miran, who consistently called for aggressive rate cuts after Trump named him Federal Reserve governor last year, has supported a slower pace of reductions in light of what he described as “somewhat less favorable” inflation dynamics.
“Energy advances have changed the distribution of risks,” he said recently in public statements. “The risks of higher inflation have increased.”
For Jon Faust, a fellow at the Center for Financial Economics at Johns Hopkins University and a former senior adviser to Powell, those comments suggest that “everyone except Trump is resigned, no matter who presides, to maintaining sustained control until things clear up a little.”
Support for cuts is unlikely to increase unless the labor market turns a corner and begins to deteriorate more noticeably. Officials will also want to have tangible evidence that inflation from both the war and last year’s tariffs has decreased. Some officials seem willing to acknowledge that it is just as likely that the Federal Reserve will have to consider rate hikes, although no one yet thinks that is the most likely outcome.
As president, Warsh would have influence over the rate debate, but not the final word. Decisions are made by a 12-person committee, which also includes the other six members of the board of governors, the president of the Federal Reserve Bank of New York and a rotating group of four presidents of the 12 regional banks.
Among those who could still get a vote is Powell.
Just days before the Federal Reserve’s policy meeting began on Tuesday, it was not entirely clear whether he would resign as chairman when his term ends on May 15. A criminal investigation into Powell and the central bank had delayed Warsh’s Senate confirmation. Powell had pledged to remain president temporarily if Warsh was not confirmed in time.
But on Friday the situation changed. In a U-turn, the Justice Department dropped its investigation into renovations at the Federal Reserve headquarters in Washington but kept open the possibility of restarting it at any time. On Sunday, Sen. Thom Tillis of North Carolina, a key Republican on the Banking Committee, said federal prosecutors had given him sufficient assurances that Powell’s legal threats were over.
Powell still faces a high-stakes decision about whether to remain governor, something he can do until January 2028. That would prevent Trump from filling the job with someone more receptive to his desires to lower rates and gain more control over the central bank.
Powell has said she will not leave the board until the criminal investigation is “completely completed, transparently and definitively.” He added that his decision will depend on what he considers “best for the institution and for the people we serve.”
Tillis suggested Sunday that the Justice Department could still appeal a federal judge’s ruling that struck down subpoenas against the Federal Reserve. He said such a move would not be aimed at going after Powell but rather at defending prosecutors’ power to issue subpoenas. However, an appeal is likely to encourage Powell to stay.
That could make for an awkward transition period for Warsh, who wants to implement sweeping changes to the way the Federal Reserve operates, including what data it favors in making rate decisions, how it communicates any policy shifts and its footprint on financial markets.
Warsh’s ability to implement these changes would require broad domestic support, something he would have to build while also managing Trump’s anger if he did not follow the policy the president wanted.
“I don’t think I’ll have much time for a honeymoon,” Faust said. “He will be in the line of fire on Day 1.”
