Divided Fed officials hold rates; Powell to stay as governor

Federal Reserve officials left interest rates unchanged, but revealed a deepening division over the outlook for policy amid increased uncertainty caused by the conflict in the Middle East.

Four officials voted against the decision, including three who objected to language in their post-meeting statement that suggested the central bank would eventually resume cutting rates.

In what will be his last press conference as Fed chair, Jerome Powell said he intends to remain at the central bank as a member of its Board of Governors. He said Justice Department officials had assured him over the weekend they wouldn’t restart a controversial criminal investigation into the central bank unless the Fed’s internal watchdog recommended that.

Still, he noted, the US Attorney for the District of Columbia has said she might reopen the probe if warranted.

“I’ve said that I will not leave the board until this investigation is well and truly over with transparency and finality, and I stand by that,” Powell said. “I will leave when I think it’s appropriate to do so.”

The Fed’s Wednesday statement said Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan “supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time.”

Governor Stephen Miran dissented in favor of a quarter-point reduction in rates.

The 8-4 vote marked the first time since October 1992 that four officials dissented against a Federal Open Market Committee decision. The committee left their benchmark federal funds rate in a range of 3.5% to 3.75%.

Short-maturity Treasury yields — which track the near-term outlook for Fed monetary policy closely — rose after the decision as investors focused on the hawkish dissenters. The rate on the two-year note was up 11 basis points at 3.95% on Wednesday, on course for its biggest daily increase on the day of a Fed interest-rate announcement since 2022.

Traders added to bets the Fed will increase rates in 2027, with about half of a quarter-point hike priced by April 2027. The US dollar rose against most of its peers.

Heading into the meeting, investors and economists widely expected the Fed to leave rates unchanged through the remainder of the year.

Officials made a slight change to their statement, adding some emphasis to a line describing uncertainty emanating from the war in the Middle East. The new wording referenced the “high level” of that uncertainty.

Officials repeated the phrase referring to “the extent and timing of additional adjustments” to rates. Policymakers lowered rates three times in the closing months of 2025.

Powell’s Future

Powell’s decision to stay will deny President Donald Trump the opportunity to fill a new vacancy at the Fed and could complicate the job of Kevin Warsh, who is on track to succeed Powell as chair pending his confirmation by the Senate.

Powell, whose term as chair ends May 15, can remain in his board seat until January 2028. Fed chairs traditionally resign from the central bank altogether, but Powell said in March he planned to stay until the DOJ probe was “well and truly over.”

In staying, Powell vowed he wouldn’t seek to overshadow Warsh or retain outsized influence over monetary policy. He also congratulated Warsh over the Senate committee vote.

The Senate Banking Committee voted Wednesday to advance Warsh’s nomination to the full Senate. Once confirmed, Warsh would take Miran’s seat.

Warsh will take the helm as the US-Israeli war with Iran continues to fan uncertainty among business leaders and economists. The resultant surge in energy prices has threatened to fuel already-stubborn inflation, and the extra burden on consumers could lead to slower growth and job cuts.

Central Bank Nightmare

That sets up a central banker’s nightmare: higher inflation and climbing unemployment that tug monetary policy in two directions at once.

For now, the unemployment rate appears to have stabilized. But net hiring has fallen to near zero over the past year, making the labor market vulnerable to shocks, according to multiple policymakers.

At the same time, inflation has been above the Fed’s 2% target for five years. As officials met on Wednesday, Brent crude prices hit their highest since June 2022. While no Fed official has said they expect the next policy move to be a hike, several are keen to signal that it could be.

A report earlier this month showed consumer price inflation surged in March by the most in nearly four years on the back of a record increase in gasoline prices. That spike is largely contained to energy prices for now, but companies and economists have warned the longer the war goes on, the more likely inflation is to bleed into non-energy goods and services.

–By Catarina Saraiva (Bloomberg)