Tonight, Powell's "last dance"

The outcome of the Fed's April FOMC meeting is virtually a foregone conclusion—interest rates will remain unchanged. However, the real focus of this meeting lies in the signals that Powell, in his final policy meeting as chairman, will send, and whether the committee will formally convey a hawkish stance that "rate cuts are essentially out of the question." The Fed will announce its interest rate decision at 2:00 AM Beijing time on April 30th. The benchmark interest rate is expected to remain unchanged in the 3.5% to 3.75% range, with a high degree of market consensus. Only Governor Miran is expected to dissent, supporting a 25 basis point rate cut. The latest developments stem from the inflation front. The Iran war and energy shocks continue to disrupt the outlook, with gasoline prices remaining above $4 and traffic in the Strait of Hormuz still heavily hampered. Meanwhile, recent employment data has shown resilience, reducing the urgency among dovish committee members to quickly support the labor market. Federal Reserve officials generally expect the decline in inflation to be delayed by another full year. Market expectations for rate cuts have narrowed significantly; Deutsche Bank has withdrawn its previous forecast of a September rate cut, adjusting its baseline scenario to the Fed "holding rates steady indefinitely" near the neutral rate. The core debate at this meeting focused on the wording of the statement and the risk assessment at the press conference—the addition or deletion of a single word in the forward guidance could send drastically different policy signals to the market. Meanwhile, with the U.S. Department of Justice ending its investigation into Powell, Kevin Warsh's path to nomination as Federal Reserve Chairman is essentially clear, making this meeting even more historically significant. The consensus is to hold rates steady, with the debate shifting to the "next step." This FOMC meeting did not include a dot plot, and interest rates themselves were virtually a foregone conclusion. The focus is whether the Fed will continue to hint at a "more likely next step is a rate cut" policy, or begin to acknowledge that the risks have shifted in both directions. According to Bank of America, the current inflation outlook is as unclear as it was at the March meeting. While stock market trading suggests the Iran war is over, energy and shipping disruptions persist, and the transmission of the conflict to core inflation remains highly uncertain. The employment side did not provide sufficient reason for the Fed to rush into a dovish stance. March non-farm payrolls, ADP, and initial jobless claims data all showed resilience in the labor market, even exhibiting some signs of improvement. This means that members who previously advocated for rate cuts are finding it more difficult to continue emphasizing "downside risks to employment" as a primary policy basis. The dovish stance has also begun to tighten, reducing the urgency for rate cuts. Prior to this meeting, the most noticeable change within the Fed was the tightening of statements by previously dovish members. Waller's speech last week not only emphasized the upside risks to inflation from the Iran war, but also mentioned the labor supply shock. He believes this means the economy may need "little or no net job creation" to maintain a stable unemployment rate. Bank of America believes Waller may still want to cut interest rates this year, but the magnitude and timing may be less than previously expected. Daly went a step further. She stated that if policy remains unchanged throughout the year, this will provide a good constraint on inflation without harming the labor market. She also believes the impact of the Iran war on inflation may be greater than its impact on growth, and Daly's current baseline scenario has shifted to a flat interest rate path throughout the year. Even Miran, the most dovish member of the FOMC, indicated he prefers three rate cuts this year rather than four, citing a worsening inflation mix since the beginning of the year. Bank of America believes that if the April meeting shows a dot plot, some members' 2026 interest rate expectations have already shifted upwards, and by June, the risk of further upward shifts is increasing.

Statement wording: A single word difference, vastly different signals

The biggest highlight of this FOMC statement is whether the Federal Reserve will hint that the policy path risk has shifted to "two-way".

The biggest highlight of this FOMC statement is whether the Federal Reserve will hint that the policy path risk has shifted to "two-way".

The current statement's use of the phrase "additional adjustments" implicitly suggests a dovish assumption that the next step will be a rate cut. Changing it to "any adjustments" or removing "additional" would mean the next step would no longer be presupposed as a rate cut, and the policy path would officially shift towards two-way openness. The March meeting minutes show that the number of committee members supporting the adoption of a two-way risk statement increased from "several" in January to "some," and the wording became more firm. Bank of America believes this is a close 50/50 assessment, but most members still prefer to maintain the existing forward guidance language. Deutsche Bank, however, tends to believe that substantive guidance adjustments will be postponed until June, when the committee will have a clearer understanding of the Middle East situation, labor market stability, and the inflation transmission path, but the risks are clearly skewed towards a hawkish stance. In addition, the statement is expected to include an adjustment: given the downward revision of fourth-quarter GDP and weak consumer spending in January and February, the Fed may downgrade its description of economic activity from "solid" to "moderate." However, Bank of America points out that this adjustment itself has a dovish tone, which contradicts the committee's overall intention to send a hawkish signal to the market. Press Conference: Powell's Tough Stance is Inevitable If this is indeed Powell's last press conference as chairman, he will most likely maintain a moderately hawkish stance. According to Bank of America, Powell's core message is likely that the Fed will firmly hold rates steady, and current policy is well-prepared to address the risks of its dual mandate. Given the continued high level of uncertainty, the Fed has no reason to contradict the market's pricing in a flat interest rate path. The most sensitive issue at the press conference is the threshold for raising interest rates. If Powell reiterates that a rate hike is not the baseline scenario for a majority on the committee, the market may interpret this as a dovish signal. If he emphasizes the importance of completing the anti-inflation mission, or points out that inflation has been above target for several consecutive years, it will be seen as a hawkish signal. It's worth noting that "inflation" was mentioned 67 times at the March press conference, while "labor market/employment/unemployment" was mentioned only 40 times, clearly indicating that inflation has become the heaviest weight on the policy scale. It's expected that he won't provide a quantitative threshold for interest rate hikes. Regarding the Iran war, Powell is expected to acknowledge both upside risks to inflation and downside risks to growth and the labor market. However, the market is more focused on which side he leans towards. If his stance is close to Daly's, meaning the war's impact on inflation is greater than its impact on growth, the market may perceive him as very hawkish. The focus is on whether interest rate cuts will be shelved or merely postponed. Nick Timiraos, often referred to as the "new Fed mouthpiece," wrote in a pre-meeting article that the April meeting marks a turning point in a deeper policy debate: how long can the Fed maintain its stance that the next step is more likely to be a rate cut than a rate hike? Timiraos pointed out that two years ago, Powell downplayed concerns about stagflation, saying, "I see neither stagflation nor inflation." But now, the combined effects of the war-induced energy shock and inflation that has yet to return to the 2% target make the historical mirror of the stagflation of the 1970s seem less distant than it once was. He emphasized that the Federal Reserve is observing how the US economy digests its fourth supply shock in five years, including the resurgence of the pandemic, the Russia-Ukraine conflict, the tariff dispute, and the Iran war. Each shock, viewed individually, might be interpreted as an isolated event requiring no policy response, but their cumulative effect makes managing inflation expectations more challenging. Timiraos believes the statement itself may be as important as the interest rate decision. If the Fed modifies the wording of its formal statement, implying that a rate cut is essentially out of the question, its market impact could be no less significant than a policy action. The final dance and the handover of power. This meeting is attracting even more attention because it may be Powell's last FOMC meeting as chairman. Powell's term as Federal Reserve chairman expires on May 15, and he has pledged to serve as interim chairman until a successor is confirmed. With the DOJ ceasing its investigation into matters related to Powell, Kevin Warsh's path to Senate confirmation is clearer. UBS expects Kevin Warsh to be sworn in before the June 16-17 FOMC meeting. If this happens, the April meeting will be the last full policy communication window of the Powell era, and the market will pay more attention to whether it leaves a policy starting point of "no rate cuts for a longer period" for the next chairman. Market Reaction: Tail Risks Beyond the Event Background Goldman Sachs' trading desk view indicates that the market as a whole regards this FOMC meeting as a low-volatility event, but different assets still have directional sensitivities. Regarding interest rates, Goldman Sachs analyst Brian Bingham expects the statement to lack a significant shift in hawkish inflation rhetoric, with Powell reiterating a wait-and-see approach. However, with only about 5 basis points priced in by December, the threshold for further significant selling and factoring in a substantial rate hike is high. If the baseline scenario deviates, the risks are more likely to point to higher interest rates, fewer rate cuts, and a flatter yield curve. Regarding foreign exchange, Goldman Sachs trader Carlie Ladda believes a slightly hawkish stance from the Fed might generate some dollar buying, but is unlikely to create a sustained rally. The market remains more focused on the situation in Iran, corporate earnings reports, and month-end factors. Trading desks tend to sell dollars when they rebound. Regarding stocks, Goldman Sachs' Vickie Chang points out that the main risk the FOMC poses to the stock market lies in Powell's potentially more cautious emphasis on the inflationary risks from commodity price shocks, which could dampen risk appetite. Currently, risk assets have largely downplayed the impact of the conflict, and downside tail risks may be underestimated.