Fed FOMC Preview: No Rate Cuts Become Consensus, Warsh Succession Imminent

TradingKey - The Federal Reserve will hold its monetary policy meeting from April 28 to 29, with markets widely expecting interest rates to remain steady between 3.50% and 3.75% for the third consecutive time. CME FedWatch data indicates that the market has fully priced in expectations for the Fed to hold steady this month.

The focus of this meeting extends beyond interest rates to include the pace following the conclusion of balance sheet reduction, the impact of oil price volatility on inflation, and the implications of the power transition after the Warsh hearings.

It is essentially a foregone conclusion that interest rates will remain unchanged.

A recent Reuters survey of 103 economists found that more than half expect benchmark interest rates to remain unchanged through the end of September. Nearly one-third of respondents believe there will be no rate cuts throughout 2026, a proportion that has nearly doubled since March. Markets have now pushed back the expected timing of the first rate cut to at least after September.

[Source: Reuters]

In March, the CPI rose 3.3% year-on-year, while energy commodities increased 10.9% month-on-month and gasoline prices surged 21.2%. Brent crude oil futures for June delivery closed at $105.07 per barrel on April 23, up more than $30 from levels seen before the conflict on February 26.

Core CPI rose 2.6% year-on-year, suggesting a lag in the pass-through of oil prices. Goldman Sachs estimates that every 10% increase in oil prices only pushes up core CPI by roughly 0.1 to 0.2 basis points, and as the impact fades over time, it is unlikely to hit the Federal Reserve's inflation target in the short term.

However, the Fed's preferred PCE inflation gauge is expected to rise to 3.7% in Q2, 3.4% in Q3, and 3.2% in Q4. These forecasts are approximately 30 basis points higher than late-March projections and remain well above the 2% target, increasing the risk that inflation expectations could become 'unanchored'.

The labor market, meanwhile, is characterized by a 'low-hiring, low-firing' equilibrium. The unemployment rate was 4.3% in March, but job growth was concentrated in only a few sectors, reflecting caution among employers regarding headcount expansion.

The monthly cap on Treasury securities redemptions has now been lowered from $60 billion to $30 billion. A Bloomberg survey in January indicated that most economists expect quantitative tightening to conclude around October 2026; this meeting may provide further clarity on the details of the endgame.

Obstacles to Warsh nomination cleared, power transition outlook brightens.

Federal Reserve Chair nominee Kevin Warsh advocated for simultaneous balance sheet reduction and interest rate cuts during a Senate hearing on April 21, explaining that a gradual runoff would leave room for rate cuts. He asserted that he would not become a puppet for Trump and refused to commit to specific interest rate decisions for the President.

On April 24, the U.S. Department of Justice concluded its criminal investigation into Jerome Powell, removing the primary obstacle to Warsh's nomination. Consequently, those who had previously influenced Senator Tillis lost their grounds for opposition. Prediction market Kalshi shows the probability of Warsh being confirmed by May 15 has risen to 86%, and reaches 97% by June 1. The market widely expects Warsh to succeed Powell upon the end of his term.

If Warsh takes office on schedule, his plan for concurrent balance sheet reduction and interest rate cuts will likely accelerate, which could lead to a rise in the U.S. Treasury yield curve and provide support for growth sectors like technology. Should the process face unexpected delays, a prolonged policy vacuum would increase short-term market volatility and put pressure on the U.S. dollar.

Market Focus and Outlook

A Reuters survey indicates that 71 economists expect at least one rate cut before year-end, broadly aligning with the dot plot. However, minutes from the March meeting showed that only Governor Milan voted in favor of a rate cut, while the others believed that maintaining rates would help in monitoring data. The upcoming meeting is expected to see an overwhelming majority vote to keep interest rates unchanged.

May 3 marks the Department of Justice's deadline to appeal the prior subpoena case; however, the investigation officially concluded on April 24, effectively ruling out an appeal. Investors should focus on nomination schedules during the Senate recess, weekly EIA inventory data, and whether the FOMC statement removes "transitory" inflation language or upgrades PCE forecasts.

Powell's press conference serves as a key window for gauging policy direction in the second half of the year and will likely be his final appearance as Fed Chair. If oil prices remain elevated and inflationary pass-through manifests, the window for rate cuts this year may narrow or close entirely. Should Warsh be confirmed, his advocacy for simultaneous balance sheet reduction and rate cuts would become a primary variable for monetary policy between the second half of 2026 and 2027.