Original author: Zhao Ying
Original source: Wall Street News
The outcome of the Fed's April FOMC meeting is almost a foregone conclusion—interest rates will remain unchanged. However, the real focus of this meeting will be on what signals Powell will send in his last policy meeting as chairman, and whether the committee will formally convey a hawkish stance that "rate cuts are essentially out of the question" to the market.
The Federal Reserve will announce its interest rate decision at 2:00 AM Beijing time on April 30. The benchmark interest rate is expected to remain unchanged in the range of 3.5% to 3.75%, with a high degree of market consensus. It is expected that only Governor Miran will dissent, supporting a 25 basis point rate cut.
The latest developments stem from the inflation front: the ongoing conflict with Iran and the energy shock continue to distort the outlook, with gasoline prices remaining above $4 and traffic in the Strait of Hormuz still heavily disrupted. Meanwhile, recent employment data has shown resilience, diminishing the urgency among dovish committee members to quickly stabilize the labor market.
Federal Reserve officials generally expect the decline in inflation to be delayed by another full year. Market expectations for interest rate cuts have narrowed significantly, with Deutsche Bank withdrawing its previous forecast of a September rate cut and adjusting its baseline scenario to the Fed "holding rates steady indefinitely" near the neutral interest rate.
The core debate at this meeting centered 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 Chair is essentially clear, adding historical significance to this meeting.
The consensus has been to remain on hold, and the debate has shifted to "the next step."
This FOMC meeting did not include a dot plot, and the interest rate itself was virtually a foregone conclusion. The focus is on whether the Fed will still retain the policy implication that "the next step is more likely to be a rate cut," or whether it will begin to acknowledge that the risks have shifted in both directions.
According to Bank of America, the current inflation outlook remains 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 situation, however, does not offer sufficient reason for the Federal Reserve to rush into a dovish stance. March non-farm payrolls, ADP employment report, and initial jobless claims data all indicate a resilient labor market, even showing some signs of improvement. This means that committee members who previously advocated for rate cuts will find it more difficult to continue emphasizing "downside risks to employment" as a primary policy justification.
Doves are also starting to tighten their stance, and the urgency to cut interest rates is decreasing.
The most notable change within the Federal Reserve prior to this meeting was that previously dovish committee members tightened their stances.
In his speech last week, Waller not only emphasized the upside risk 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 hope for a rate cut this year, but the magnitude of the cut may be smaller and the timing later than previously expected.
Daly went a step further. She stated that if policy remains unchanged throughout the year, this will effectively constrain 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 sends vastly different signals
The biggest point of interest in this FOMC statement is whether the Federal Reserve will hint that the risks to the policy path have shifted to a "two-way" direction.
The current statement's use of the phrase "additional adjustments" implicitly suggests a dovish assumption that the next step will be an interest rate cut. Changing it to "any adjustments" or removing "additional" would mean the next step is no longer presupposed to be an interest rate cut, and the policy path would officially shift towards two-way opening. 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 resolute.
Bank of America believes this is a close 50/50 assessment, but most committee members still prefer to maintain the existing language of forward guidance. Deutsche Bank, on the other hand, tends to believe that substantive guidance adjustments will be postponed until June, when the committee will have a clearer understanding of the situation in the Middle East, labor market stability, and the path of inflation transmission, but the risks are clearly skewed towards a hawkish stance.
Furthermore, the statement is expected to include one adjustment: given the downward revision of fourth-quarter GDP and weak consumer spending in January and February, the Federal Reserve 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 remain firmly on hold, and that current policy is well-prepared to address the risks associated with 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 raising rates is not the baseline scenario for a majority of the committee, the market may interpret this as a dovish signal. If he emphasizes the importance of completing the anti-inflation task, 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 factor on the policy scale. It is expected that he will not provide a quantitative threshold for interest rate hikes.
Regarding the war with Iran, 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—that the war's impact on inflation is greater than its impact on growth—the market may interpret it as very hawkish.
The focus is on whether the interest rate cut will be shelved or merely postponed.
Nick Timiraos, known 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 points 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 did.
He emphasized that the Federal Reserve is observing how the U.S. 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, taken individually, could be interpreted as an isolated event requiring no policy response, but when they accumulate, managing inflation expectations becomes more challenging.
Timiraos believes the statement itself could be just as important as the interest rate decision. If the Federal Reserve modifies the wording of its official statement, suggesting that a rate cut is essentially out of the question, its market impact could be no less significant than a policy action.
The Last Dance and the Handover of Position
This meeting is attracting even more attention because it may be the last FOMC during Chairman Powell's tenure.
Jerome 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 has become clearer.
UBS expects Kevin Warsh to be sworn in before the FOMC meeting on June 16-17. 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 beneath the surface of non-event-related issues
Goldman Sachs' trading desk view indicates that the market as a whole views 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 the probability of a real 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.
In the foreign exchange market, Goldman Sachs trader Carlie Ladda believes that a slightly hawkish stance from the Federal Reserve may bring some dollar buying, but it is unlikely to form 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 equities, Goldman Sachs' Vickie Chang points out that the main risk the FOMC poses to the stock market is that if Powell emphasizes the inflationary risks from commodity price shocks more cautiously, it could dampen risk appetite. Currently, risk assets have largely downplayed the impact of the conflict, and downside tail risks may be underestimated.
