Jerome Powell's Last FOMC Meeting as Fed Chair Is Being Overshadowed by a Possible Narrative Shift

Today, April 29, is a history-maker for the Federal Reserve. It marks the final time Jerome Powell will oversee a Federal Open Market Committee (FOMC) meeting as Fed chair. The FOMC is the 12-person body (including Powell) responsible for setting the nation's monetary policy.

In just over two weeks, on May 15, Powell's second term as Fed chair will officially end. While this doesn't come as a surprise to Wall Street, it's the type of change that can unnerve the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC).

Fed Chair Jerome Powell will oversee his final FOMC meeting on April 29. Image source: Official Federal Reserve Photo.

Sitting presidents are responsible for nominating the head of the central bank, with terms lasting four years, if confirmed. Since President Donald Trump was inaugurated for his second, non-consecutive term, he's been publicly quarreling with Powell. Whereas Trump favors aggressive interest rate cuts, Powell has proclaimed that economic data will guide the FOMC's policy decisions.

While the spotlight of today's FOMC meeting should be on Powell, a potential narrative shift is likely to steal the show.

One way or another, a narrative shift appears imminent for the FOMC

Putting aside the nostalgia of Powell's last hurrah, the big story continues to be the inflationary impact of the Iran war.

Shortly after the U.S. and Israel commenced attacks against Iran on Feb. 28, the latter shut down the Strait of Hormuz to virtually all commercial vessels. This represents the largest energy supply disruption in modern times, and it's had a knee-jerk effect on crude oil and energy prices.

US Inflation Rate data by YCharts.

In February, trailing 12-month (TTM) U.S. inflation was a modest 2.4%. But in March, the first month to account for the inflationary effects of the Iran war, TTM inflation jumped 90 basis points to 3.3%. Based on estimates from the Federal Reserve Bank of Cleveland's Inflation Nowcasting tool, inflation will jump another 26 basis points to 3.56% in April.

This projected 116-basis-point, two-month increase would move U.S. inflation to its highest level in roughly three years. More importantly, it almost certainly removes any hope of the FOMC cutting rates further. That's terrible news for a pricey stock market that's been factoring in additional rate cuts.

But this isn't the only narrative shift overshadowing Powell's last FOMC meeting. Trump's Fed chair nominee, Kevin Warsh, is making waves of his own.

In recent testimony before the Senate Banking Committee, Warsh laid out his vision for the central bank and criticized the Fed's bloated $6.7 trillion balance sheet. The Fed chair nominee strongly believes that a leaner balance sheet and a central bank that acts behind the scenes will be positive for the long-term inflation outlook.

US Total Assets Held by All Federal Reserve Banks data by YCharts.

However, Warsh's desire to deleverage the Fed's balance sheet may come with unintended consequences for the Dow, S&P 500, and Nasdaq Composite.

The central bank's balance sheet is primarily made up of long-term U.S. Treasury bonds and mortgage-backed securities. Since bond prices and yields are inversely related, selling trillions of dollars of U.S. Treasuries would be expected to lower bond prices, raise yields, and increase borrowing costs. Although Warsh has a long-term vision, his actions could demonstrably raise interest rates in the near term.

One way or another, a narrative shift appears imminent.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.