Powell “remains,” three voting members oppose rate cuts—this is the succession scenario facing the new Fed chair, Waller.

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On the eve of stepping down, current Federal Reserve Chair Jerome Powell announced that he would remain as a governor, adding to a rare and severe internal split within the Federal Open Market Committee (FOMC) over the path of rate cuts, thus presenting an incoming Chair Warsh with a highly challenging and uncertain transition scenario.

At its April 28–29 policy meeting concluded on Wednesday, the Fed maintained its target range for the federal funds rate at 3.5% to 3.75% as expected. However, the meeting saw the most dissenting votes since 1992, with four officials objecting to the monetary policy decision, including three who strongly opposed the language in the statement hinting at possible future rate cuts.

Meanwhile, in his final press conference as Chair, Powell stated unambiguously that he would continue to serve as a Fed governor until the investigation into the Fed headquarters renovation project is thoroughly completed. U.S. Treasury Secretary Bassent sharply criticized this move as a breach of tradition and considered it an insult to the new leadership team.

The internal deadlock and geopolitically driven inflation shocks directly hit financial markets. Investors’ expectations for easing were rapidly dampened, with market pricing showing the probability of a rate cut this year has shrunk dramatically. This means Warsh, an advocate for rate cuts, will face extremely tough policy choices when he takes office in June.

Biggest Disagreement in Thirty Years Hits Rate Cut Hopes

At this meeting, the Fed decided to keep the target range for the federal funds rate at 3.5% to 3.75%. However, the rare divergence within the FOMC became a core market focus.

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 supported holding rates steady but strongly objected to any language in the statement implying that a rate cut could be the Fed’s next move.

All three regional Fed presidents had previously voiced concerns about a resurgence in inflation. In the post-meeting press conference, Powell admitted that the debate over the statement’s wording was very intense, and since the last meeting, the group favoring more neutral language had grown substantially.

Investors quickly reacted to the Fed’s more hawkish tone. According to Morningstar, market expectations for a rate cut this year plunged from 18% the day before to just 3% on Wednesday. Morningstar Chief US Economist Preston Caldwell predicted no cuts until 2027; he warned that if inflation becomes self-reinforcing, the Fed might have to abandon rate cuts altogether and even consider hikes.

Sticky Inflation and External Shocks Limit Room for Easing

The key obstacles to Fed rate cuts lie in stubborn inflation data and the compounded effects of external geopolitical shocks.

Data show that the Fed’s preferred inflation metric—the core Personal Consumption Expenditures (PCE) Price Index—rose by 3% in February, mainly driven by tariffs on goods. The overall inflation rate, including food and energy, was 2.8%, with markets generally expecting a marked increase for March. Overall, US inflation has stayed above the Fed’s 2% annual target for five consecutive years.

Additionally, the surge in oil prices triggered by the Iran war has further complicated the Fed’s decision-making environment. Powell noted that while the Fed traditionally ignores short-term energy price swings, with tariff-driven inflation already high, energy shocks could push up other prices—airline tickets have already started to rise. The Fed must see energy prices decline and tariff pressures wane before considering the next move on rates.

Powell’s Unusual Retention Stirs Leadership Conflict

In addition to tricky economic data, the stability of the Fed’s institutional structure is also in focus. Powell announced that he would remain as a Fed governor until the investigation into cost overruns on the Washington HQ renovation is fully complete. His term as governor will last until early 2028.

Powell described this move as a response to unprecedented “legal attacks” on the Fed.

In January, the US Justice Department launched a criminal investigation into testimony related to the renovation project. Although US Attorney Jeanine Pirro recently stated the investigation had concluded, it could be reopened at any time. Additionally, the Supreme Court is still hearing a case about whether the President can dismiss Fed Governor Lisa Cook. Powell emphasized that he was concerned these political attacks were undermining the Fed’s core ability to conduct monetary policy free from political interference.

However, this decision drew fierce criticism.

In an interview with Fox Business, Treasury Secretary Bassent publicly criticized Powell’s move as a grave breach of Fed norms. Bassent said this action was an “insult” to Kevin Warsh as well as fellow Republican appointees Michelle Bowman and Christopher Waller, implying that Powell believed only he could safeguard the Fed’s integrity.

New Chair Faces Complex Start

Against this backdrop, as an advocate of rate cuts, Warsh faces a challenging road ahead as he assumes the Fed’s helm. He is expected to be confirmed by the Senate in late May and will likely chair his first FOMC meeting on June 16–17.

At his Senate confirmation hearing, Warsh stated that he hoped the Fed would reduce the tendency to seek consensus and encourage more frank disagreements. Now, faced with high inflation data, three voting members firmly opposing easing, and his predecessor Powell still at the table, the new Chair will need to find a balance in steering Fed policy amid a highly challenging internal dynamic and a complex macroeconomic environment.

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