Powell: The Long Goodbye

Author: Zhou Hao

Abstract：

The FOMC meeting last night and this morning,judging from the wording of the statement, the voting structure, and the post-meeting statements, the overall tone was clearly hawkish, exceeding the market's previous expectations of a "mild and neutral" stance. The most notable feature of the meeting was the highly divided voting results. Four dissenting votes, a record high in over thirty years, were cast, with three regional Fed presidents explicitly opposing maintaining an "accommodative bias" in the statement, while another governor advocated for an immediate rate cut. This division reinforced market interpretations that, at this stage, the FOMC remains highly wary of prematurely signaling easing. Powell himself acknowledged a subtle shift in the committee's stance and did not rule out adjusting policy guidance as early as the next meeting. Choosing to release hawkish signals at the end of his term is difficult to interpret simply as a response to short-term economic data. It's more like Powell's final commitment to his core principles—maintaining central bank independence and firmly anchoring inflation expectations. Against the backdrop of a political cycle shift and increasing external pressure, he clearly hopes to avoid the market misinterpreting the Fed as preparing to shift course before inflation is fully under control through a clear and restrained stance. This aligns with his long-term policy orientation and can also be seen as a "systemic safeguard" he leaves for his successor. The financial markets reacted swiftly. US Treasury yields rose significantly, particularly at the short end, interest rate expectations were repriced, the probability of a rate cut this year was greatly reduced, and the market even began discussing the possibility of further rate hikes in the longer term. Geopolitical risks amplified this hawkish interpretation. As the Iran war enters its third month and oil prices rise to near-record highs, the Federal Reserve, unusually, mentioned the dual risks to inflation and employment in its statement. However, overall, these are more reinforcing factors than the root cause of a shift in stance. Looking ahead, as Powell gradually fades from the central stage, the policy reins will be handed over to Warsh. The challenge of this new phase lies in balancing the political environment with central bank independence, coordinating the balance sheet reduction process with the interest rate path, and managing the pace between declining inflation and economic slowdown. Compared to these complex issues, Powell's "last meeting" appears remarkably direct and resolute—ending with a hawkish stance may be the most appropriate way for him to say goodbye. Last night and this morning's FOMC meeting was destined to be more than just a routine interest rate decision. As his term draws to a close, Powell has left a distinctively personal mark on his chairmanship: **interest rates remained unchanged, but the stance was clearly hawkish, even more so than the market had anticipated.** This choice is less an immediate assessment of the economic outlook and more a longer-term, institutionalized expression. On the surface, the policy outcome is not complex: the Fed kept interest rates within the 3.50%–3.75% range, consistent with most institutions' assessment of a "wait-and-see" approach. However, what truly triggered a strong market reaction was the wording of the statement and the voting results themselves. **Four dissenting votes represent a level of divergence not seen in over thirty years; more importantly, the opposition primarily focused on rejecting the "easing bias," rather than advocating for further easing.** This structural division, to some extent, reinforced the hawkish nature of the policy stance. Powell's post-meeting remarks did not attempt to "reassur" the market. He explicitly acknowledged a subtle shift in the committee's stance and did not rule out the possibility of completely removing the dovish bias at the next meeting. In a meeting considered a "farewell performance," such a statement was particularly significant. For an outgoing chairman, choosing to end with a hawkish stance is hard not to interpret as a proactive and sober decision. Behind this decision lies Powell's consistent core concern—maintaining the central bank's independence and firmly controlling inflation expectations. Against the backdrop of an impending political shift and rising external interference, he clearly wanted to leave a clear, even slightly hawkish, policy signal: the Fed's decision-making logic should not be swayed by short-term sentiment, nor should it compromise prematurely to potential political pressure. From this perspective, this meeting may have been exactly what Powell, as the head of the central bank, "most wanted to do," and a principled adherence he made at the end of his term. The market quickly grasped this. US Treasury yields rose sharply after the decision was announced, with a particularly strong reaction at the short end. The two-year yield recorded its most significant FOMC decision-day increase since 2022, and long-term yields also rose to a one-month high. Interest rate expectations have been repriced, with rate cuts this year almost marginalized. Instead, the tail risks of rate hikes have been re-incorporated, and some funds are even discussing the possibility of further tightening in the longer term, as late as 2027. The equity market is clearly under pressure, with interest rate-sensitive sectors bearing the brunt, reflecting concerns about a potential tightening of financial conditions. Of course, the external environment also provides a realistic backdrop for this hawkish interpretation. The Iran war has entered its third month, oil prices have climbed to a near four-year high, and the Federal Reserve, in its statement, unusually mentioned the dual risks to inflation and employment simultaneously. However, it's important to note that this conflict is more like an amplifier than a fundamental cause of the shift. Even without geopolitical disturbances, the voting structure and the language of the statement clearly demonstrate the FOMC's wariness of prematurely releasing easing signals. More noteworthy is the Federal Reserve after Powell. **Although he will remain in his post as a board member, policy leadership will ultimately be handed over to Warsh.** Rather than short-term labels like "hawkish," the real challenge lies in balancing rising political pressure with central bank independence, coordinating interest rate path and balance sheet policy in the context of incomplete balance sheet reduction, and finding a credible turning point between declining inflation and economic slowdown. Compared to these complex and thorny issues, Powell's final meeting appeared simple and restrained: **He prioritized inflation control and institutional independence, and adopted a hawkish stance to conclude his term as chairman.** This may not be reassuring for the market, but from the perspective of central bank history, such a farewell may not be the most appropriate way for him.