Powell Delayed; Three Committee Members Oppose Rate Cuts; The Fed’s “Succession Situation” at Waller and the Wash Fed

Author: Ye Zhen, Wall Street Insights

On the eve of stepping down, the current Federal Reserve Chair Jerome Powell announced that he will remain as a governor. Combined with rare, serious disagreements inside the Federal Open Market Committee (FOMC) over the rate-cut path, this creates a complex succession situation for Waller, who is set to take over, filled with challenges and a very high level of uncertainty.

At the policy meeting held April 28-29, which concluded on Wednesday, the Fed kept the target range for the federal funds rate at 3.5% to 3.75%, as expected. However, this meeting saw the highest number of dissenting votes since 1992, with four officials opposing the monetary policy action. Among them, three strongly opposed the language in the statement that hinted at future rate cuts.

At the same time, at his final press conference as chair, Powell made clear that he will continue to serve as a Federal Reserve governor until the investigation into cost overruns related to the renovation project at the Fed’s Washington headquarters is thoroughly completed. U.S. Treasury Secretary Besent sharply criticized this move as a disruption to the Fed’s traditions and said it was an insult to the incoming leadership.

The internal impasse, along with inflation pressures driven by geopolitics, directly hit financial markets. Investors’ expectations for an easing policy cooled sharply, and market pricing shows that the probability of rate cuts this year has shrunk drastically. This means that Waller—who advocates for rate cuts and is scheduled to take office in June—will face extremely tough policy considerations when he assumes the role.

The biggest split in three decades undermines rate-cut expectations

At this meeting, the Fed decided to keep the target range for the federal funds rate at 3.5% to 3.75%. However, the FOMC’s rare split became the focus of market attention.

Governor Stephen Miran voted in favor of an immediate rate cut, while Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan, though they supported maintaining interest rates at their current level, strongly opposed the statement language implying that rate cuts could be the next step.

All three regional Fed presidents had previously publicly expressed concerns about a rebound in inflation. In the press conference after the meeting, Powell acknowledged that the committee’s debate over the statement wording had been extremely intense, and said that the camp favoring more neutral language has significantly expanded since the previous meeting.

Investors quickly reacted to what they perceived as a strengthening of the Fed’s hawkish voices. According to Morningstar data, market expectations for rate cuts this year plunged from 18% on Wednesday to just 3% the day before. Morningstar’s chief U.S. economist Preston Caldwell said he expects no rate cuts before 2027. He warned that if inflation becomes self-reinforcing, the Fed may have to completely abandon rate cuts and instead consider rate hikes.

Sticky inflation and external shocks limit room for easing

The key factor hindering the Fed’s pace of rate cuts is the compounded effect of stubborn inflation data and external geopolitical shocks.

The data show that the inflation gauge favored by the Fed—the core Personal Consumption Expenditures (PCE) price index—rose 3% in February, mainly driven by goods tariffs. Overall inflation, including food and energy, was 2.8%, while markets broadly expected March’s data to rise sharply. Overall, U.S. inflation has been above the Fed’s 2% annual target for five consecutive years.

In addition, the surge in oil prices triggered by the Iran war further complicates the Fed’s decision-making environment. Powell noted that although the Fed traditionally tends to look through short-term energy price volatility, in a backdrop where tariff-driven inflation has already remained elevated, energy shocks could raise prices in other categories—for example, airline fares have already started to increase. The Fed must see energy prices fall and tariff-driven inflation begin to recede before it can consider taking the next step on interest rates.

Powell’s exceptional decision to stay sparks a leadership clash

Beyond the tricky economic data, the institutional stability of the Fed has also become a focus. Powell announced that he will continue to serve as a Federal Reserve governor until the investigation into cost overruns related to the renovation project at the Fed’s Washington headquarters is thoroughly completed. His term as a governor will run until early 2028.

Powell characterized this move as a response to what he called an unprecedented “legal attack” on the Fed.

In January, the U.S. Department of Justice launched a criminal investigation into his testimony regarding the renovation project. Although U.S. prosecutor Jeanine Pirro said recently that the investigation had ended, it could be restarted at any time. In addition, the U.S. Supreme Court is currently still hearing a case regarding whether a president can remove Fed governor Lisa Cook. Powell emphasized that he is concerned these political attacks are undermining the Fed’s core ability to carry out monetary policy without being disrupted by politics.

However, this decision drew strong criticism.

U.S. Treasury Secretary Besent publicly attacked Powell’s decision in an interview with Fox Business, saying it severely violates Fed norms. Besent said this move is an “insult” to Kevin Warsh and to fellow Republican nominees, governors Michelle Bowman and Christopher Waller—implying that Powell believes only he can uphold the Fed’s integrity.

The new chair faces a complex start

Against this backdrop, as an advocate for rate cuts, Waller’s path to taking over the Fed is full of challenges. He is expected to receive Senate confirmation in late May and is highly likely to preside over his first FOMC meeting on June 16-17.

Waller previously said at a Senate hearing that he hopes the Fed will reduce its tendency to seek consensus internally and encourage more candid disagreements. Now, facing elevated inflation data, three voters who firmly oppose easing, and former Chair Powell still seated at the same conference table, this new chair will have to find a balance in steering the Fed’s policy amid a highly challenging internal lineup and a complex macroeconomic environment.