Tonight, Powell's "Last FOMC" session: probably holding steady, but with a stronger hawkish tone

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Author: Zhao Ying

Source: Wall Street Insights

The results of the Federal Reserve’s April FOMC meeting are almost a foregone conclusion—interest rates will remain unchanged, but the real highlight of this meeting lies in the signals that Chairman Powell will send in his final policy meeting as chair, and whether the committee will officially convey a hawkish stance of “rate hikes are essentially off the table.”

The Federal Reserve will announce its rate decision at 2:00 a.m. Beijing time on April 30, with the benchmark rate expected to stay between 3.5% and 3.75%. Market consensus is highly unified, with only Governor Miran expected to dissent, supporting a 25 basis point cut.

The latest changes come from the inflation front, as ongoing conflicts in Iran and energy shocks continue to disrupt outlooks. Gasoline prices remain above $4, and traffic through the Strait of Hormuz remains highly restricted. Meanwhile, recent employment data shows resilience, weakening the urgency among dovish members to quickly support the labor market.

Federal Reserve officials generally expect that the decline in inflation will be delayed by another full year. Market expectations for rate cuts have significantly narrowed; Deutsche Bank has withdrawn its previous forecast of a rate cut in September, adjusting its baseline scenario to the Federal Reserve remaining “on hold indefinitely” near the neutral rate.

The core debate at this meeting centers on the language of the statement and the risk tone of the press conference—adding or removing a single word in the forward guidance could send very different policy signals to the market. Meanwhile, with the U.S. Department of Justice ending its investigation into Powell, Kevin Waugh’s nomination as Fed Chair is now largely assured, adding a historic significance to this meeting.

Consensus on holding steady, controversy over “next steps”

This FOMC has no dot plot, and the rate itself is almost a certainty. The focus is whether the Fed still intends to signal that “a rate cut is more likely than a rate hike” or if it is beginning to acknowledge that risks have become two-sided.

According to Bank of America, the current inflation outlook remains as uncertain as it was at the March meeting. Although stock market trading seems to suggest that the Iran conflict has ended, energy and shipping disruptions persist, and the transmission of conflict to core inflation remains highly uncertain.

On the employment side, there is not enough reason for the Fed to rush to dovishness. March non-farm payrolls, ADP data, and initial jobless claims all show a resilient labor market, with some signs of improvement. This makes it harder for members who previously advocated rate cuts to continue emphasizing “downside employment risks” as the main policy rationale.

Doves are also tightening their stance, reducing the urgency for rate cuts

Before this meeting, the most notable internal change at the Fed was that members previously leaning dovish have begun to tighten their language.

Waller’s speech last week not only emphasized inflation risks from the Iran conflict but also mentioned shocks to labor supply. He believes this means the economy “almost does not need or does not need net new employment” to maintain stable unemployment. BofA suggests Waller may still hope for rate cuts this year, but the magnitude may be smaller than previously expected, and the timing later.

Daly’s comments go even further. She stated that if policy remains unchanged throughout the year, it would provide good restraint on inflation without harming the labor market. She also believes that the impact of the Iran conflict on inflation may be greater than on growth, and her baseline scenario has shifted to a flat interest rate path for the year.

Even the most dovish member of the FOMC, Miran, indicated a preference for three rate cuts this year instead of four, citing the worsening inflation outlook since the beginning of the year. BofA suggests that if there is a dot plot at the April meeting, some members’ 2026 rate expectations will be raised, and the risk of further “dots” moving higher by June remains.

Language in the statement: a single word can send very different signals

The biggest highlight of this FOMC statement is whether the Fed will hint that the policy path risks have shifted to a “two-sided” outlook.

Currently, the language about “additional adjustments” in the statement implies a dovish expectation of a rate cut. Changing it to “any adjustments” or removing “additional” altogether would mean the next move is no longer pre-committed to a rate cut, and the policy path would officially become two-sided. The March minutes showed that the number of members supporting a two-sided risk language increased from “several” in January to “some,” with stronger wording.

Bank of America considers this a near 50-50 judgment, but most members still prefer to keep the current forward guidance unchanged. Deutsche Bank leans toward believing that substantive guidance adjustments will be delayed until June, when the committee will have more clarity on Middle East tensions, labor market stability, and inflation transmission, but the risks will clearly tilt hawkish.

Additionally, the statement is expected to include a possible adjustment: given the downward revision of Q4 GDP and weak consumption in January and February, the Fed might downgrade its description of economic activity from “solid” to “moderate.” However, BofA notes that this change is dovish in tone and somewhat contradicts the overall message the committee wants to send of hawkish signals.

Press conference: Powell’s tough stance is inevitable

If this is indeed Powell’s last press conference as chair, he is likely to maintain a moderately hawkish tone.

According to BofA, Powell’s core message may be that the Fed will remain steadfast, with current policy fully prepared to address the risks of its dual mandate. Given the high level of uncertainty, the Fed has no reason to contradict market pricing that expects rates to stay flat.

The most sensitive question at the press conference will be about the rate hike threshold. If Powell reiterates that rate hikes are not the committee’s baseline, markets may interpret this as a dovish signal. If he emphasizes the importance of completing the inflation fight or notes that inflation has been above target for several years, it would be seen as hawkish.

It’s worth noting that at the March press conference, “inflation” was mentioned 67 times, while “labor market/employment/unemployment” was only mentioned 40 times, indicating inflation has clearly become the most influential factor in policy balancing. He is unlikely to provide a specific quantitative threshold for rate hikes.

Regarding Iran, Powell is expected to acknowledge both upside risks to inflation and downside risks to growth and the labor market. But the market is more focused on which side he leans toward. If his tone aligns with Daly’s, emphasizing that the conflict impacts inflation more than growth, it could be viewed as very hawkish.

Is the rate cut on hold, or just postponed?

Nick Timiraos, dubbed the “New Federal Reserve News Agency,” wrote before the meeting that April’s meeting marks a deeper policy debate: how long can the Fed maintain the stance that “a rate cut is more likely than a rate hike”?

Timiraos pointed out that two years ago, Powell downplayed concerns about stagflation, saying “neither recession nor inflation is visible.” But now, the energy shocks from war and inflation that has not yet returned to 2% make the historical mirror of stagflation in the 1970s less distant.

He emphasizes that the Fed is watching how the U.S. economy absorbs the fourth supply shock in five years, including reopening after the pandemic, Russia-Ukraine conflict, tariffs, and the Iran war. Each shock alone might be explained as a one-off event not requiring policy response, but the cumulative effect makes managing inflation expectations more challenging.

Timiraos believes the statement itself could be as important as the rate decision. If the Fed modifies its official language to suggest that rate cuts are essentially off the table, the market impact could be as significant as a policy move.

The final act and leadership transition

This meeting is also more scrutinized because it could be Powell’s last FOMC as chair.

Powell’s term as Fed Chair will end on May 15, and he has previously committed to serve as “acting chair” until his successor is confirmed. With the DOJ ending its investigation into Powell, Kevin Waugh’s confirmation process in the Senate is now clearer.

UBS expects Waugh to be sworn in between June 16 and 17, before the June FOMC meeting. If this timeline holds, April’s meeting will be Powell’s last full policy communication window, and markets will pay more attention to whether he leaves a “longer pause” policy starting point for the next chair.

Market reactions: tail risks beneath the non-event surface

Goldman Sachs’s trading desk suggests that the market generally views this FOMC as a low-volatility event, but asset-specific sensitivities remain.

On rates, Goldman analyst Brian Bingham expects no significant hawkish shift in the statement, with Powell reiterating a wait-and-see approach. However, current pricing through December implies only about 5 basis points of potential change, and the threshold for further large sell-offs and actual rate hikes remains high. If the baseline scenario deviates, risks are more likely skewed toward higher rates, fewer cuts, and a flatter yield curve.

In forex, Goldman trader Carlie Ladda believes a slightly hawkish Fed could bring some dollar buying, but sustained trends are unlikely. The market remains focused on Iran, corporate earnings, and month-end factors. The trading desk tends to sell dollars on dollar rebounds.

In equities, Goldman’s Vickie Chang notes that the main risk to stocks from the FOMC is if Powell emphasizes the inflation risks from commodity price shocks more cautiously, which could dampen risk appetite. Currently, risk assets have largely discounted conflict impacts, and downside tail risks may be underestimated.