RJ Hamster
The “Powell Era” Ends with a Divided Fed
Powell’s final act… more of the “wait and see” approach… the Warsh Fed takes shape … why the balance sheet matters more than the interest rate
The Federal Reserve wrapped up its April FOMC meeting today, voting to hold its benchmark federal funds rate steady at 3.5%-3.75%.
This marks the third consecutive meeting in which the committee chose to stand pat, following three straight cuts to close out 2025.
The hold was fully expected. What wasn’t entirely expected was just how divided the committee turned out to be.
The vote split 8-4, the most dissents at a Fed meeting since October 1992.
To be clear, three of the four dissenters – Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan – agreed with the hold on rates. Their objection was to the “easing bias” language retained in the statement, specifically the phrase referencing “additional adjustments to the target range,” which implies the next move is more likely down than up. They don’t want to signal that anymore.
That’s not to be confused with a preference for a rate hike. As Powell said in his press conference, answering a question on this: “No one’s calling for a hike.”
The fourth dissenter, Fed Governor Stephen Miran, went the other direction – he pushed for a quarter-point cut today.
So, the primary disagreement inside the Fed isn’t about the immediate decision. It’s about what posture the central bank should project heading into an environment where the inflation picture remains genuinely murky.
On that front, Powell was direct about why the inflation picture is murky: the Middle East conflict
The FOMC’s statement acknowledged that the war is “contributing to a high level of uncertainty about the economic outlook,” with elevated inflation tied to the “recent increase in global energy prices.”
Powell’s core point about this in the press conference was straightforward – no one knows how long this conflict will last, so the Fed can’t confidently model what will happen to energy prices and related inflation.
This resulted in Powell’s usual tap-dance routine with the press. For example, when asked about high oil prices and the risk of elevated core inflation readings, Powell said:
We’re just going to have to wait and see.
But he did say that inflation is “already kind of misbehaving,” though it’s too soon to see the full extent of it.
For doves wanting rate cuts, Powell didn’t offer much encouragement. He said that the energy shock “hasn’t even peaked yet,” and that the Fed would want to see the back side of it before even thinking about reducing rates.
Overall, as usual, “wait and see” was Powell’s bottom line for interest rate policy in light of all the uncertainty today:
We’re in a good place to wait and let things develop.
As for Powell himself, he confirmed he will remain on the Board of Governors for a time “to be determined,” serving out his term as governor, which runs through January 2028.
But he was clear about saying that he will not be a “shadow chair”:
I plan to keep a low profile as a governor.
There’s only ever one chair of the Federal Reserve Board. When Kevin Warsh is confirmed and sworn in, he will be that chair.
Overall, there were no major curveballs today – and the market seemed to agree.
Stocks were mixed but largely held their ground, with most of Wall Street’s attention focused on the Magnificent Seven earnings due after the bell.
We’ll report on these tomorrow.
Speaking of Kevin Warsh, he got one step closer today to being the new Fed Chair.
While Powell was preparing for his press conference this afternoon, the Senate Banking Committee was voting on his replacement.
In a vote that fell along party lines, the Committee advanced Warsh’s nomination to be the new Fed chair. The full Senate vote is expected the week of May 11.
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So, who is Warsh, and what kind of Fed will he run?
Warsh served on the Fed’s Board of Governors from 2006 to 2011. His tenure overlapped with the 2008 financial crisis, during which he helped manage the central bank’s response under then-Chair Ben Bernanke.
During that period, he earned a reputation as a rate hawk – someone who generally preferred higher interest rates as a tool for maintaining price stability.
Since leaving the Fed, he has become one of its most vocal critics. He was an early proponent of the bond-buying programs that expanded the Fed’s balance sheet during the financial crisis but grew increasingly skeptical of the practice over time – ultimately tendering his resignation over the central bank’s continued purchases.
President Donald Trump nominated him with the expectation that he would cut interest rates, but the President may not get what he bargained for.
At his confirmation hearing last week, Warsh tried to thread a difficult needle. On one hand, he voiced support for Fed independence:
Monetary policy independence is essential. Monetary policymakers must act in the nation’s interest.
On the other hand, he defended the right of elected officials to weigh in on rates – a position Democrats hammered as cover for political interference.
When pressed directly by Senator Elizabeth Warren on whether he would be Trump’s “sock puppet” at the Fed, Warsh pushed back:
I’m honored the president nominated me for the position, and I’ll be an independent actor if confirmed as chairman of the Federal Reserve.
Whether that independence holds under political pressure will be the central question of the Warsh era.
Warsh is not the pure hawk his reputation suggests. He favors rate cuts, though paired with a meaningful reduction in the Fed’s balance sheet.
And yet, this is the part of the Warsh story that most financial coverage has missed. And it matters – directly – to your mortgage, your borrowing costs, and your portfolio.
Let’s talk about why…
The potential for stealth tightening under Warsh
Most of the Warsh coverage has centered on one question…
Will he cut the fed funds rate sooner than Powell would have, or later?
While that question matters in the short term, another question has far more impact on the long-term outlook.
The more consequential issue is Warsh’s interest in reducing the Fed’s balance sheet – a $6.7 trillion portfolio of Treasury bonds and mortgage-backed securities that has ballooned from less than $900 billion before the 2008 financial crisis.
Consider what that massive expansion actually did…
When the Fed buys bonds, it floods the financial system with cash. All that cash has to go somewhere – and it did.
It flowed into stocks, real estate, corporate debt, and venture capital. It suppressed long-term interest rates far below where a free market would have set them. And it made borrowing artificially cheap for corporations, homebuyers, and the federal government alike.
In short, it inflated the price of nearly every asset you can name.
That was the point – at least initially. In the depths of the 2008 crisis and again during COVID, the Fed used its balance sheet as an emergency tool to prevent financial collapse.
The problem is that the emergency never fully ended, at least not on the Fed’s books. The balance sheet stayed swollen long after the crisis passed.
But a decade-plus of artificially suppressed rates has consequences: a housing market that’s priced out of reach for first-time buyers… a stock market trading at the second highest CAPE valuation in more than 140 years… and today’s federal debt that has crossed $39 trillion, financed for years at rates that never reflected the true cost of borrowing – a bill that gets far more expensive to service the moment those artificial supports are removed.
Warsh argues that this distortion is still baked into the system. At $6.7 trillion, the Fed’s footprint in the bond market remains enormous.
But if we remove the Fed as a perpetual bond buyer, demand likely falls. And that can mean the Treasury will have to offer higher yields to attract other buyers. Mortgage rates follow. Corporate borrowing costs follow. And the whole long end of the curve faces upward repricing pressure – not because of anything Warsh does with the fed funds rate, but because the artificial support is being withdrawn.
That’s the mechanical effect of removing a major price-insensitive buyer from the market – regardless of policymakers’ intentions.
That is why the balance sheet story is bigger than the rate story. The fed funds rate is the number everyone watches. But the balance sheet is the lever that moves the rates everyone actually pays.
To be clear, this is not necessarily Warsh’s goal. His argument is that if done credibly, this mix could actually lower inflation expectations and allow long-term rates to stabilize or even fall.
Still, “if” and “could” are doing a lot of work there.
Warsh has been explicit about his intentions
On the Larry Kudlow program last summer, he said:
You could take down that balance sheet a couple trillion dollars over time, in concert with the Treasury secretary.
That’s a big rate cut that could come, and what you would do then is turbo-charge the real economy, where things are somewhat tougher, and ultimately the financial markets would be fine.
Let’s make sure we’re on the same page about this…
When the Fed lowers rates, it loosens economic conditions. But when it shrinks its balance sheet, it tightens them – because pulling cash out of the system has the same basic effect as making that cash more expensive to borrow.
Warsh’s strategy is to execute both simultaneously – not explicitly to steepen the curve, but to normalize how it’s set.
Cut the fed funds rate to give the economy some relief on short-term borrowing costs – meanwhile, shrink the balance sheet and withdraw the liquidity that has been artificially suppressing long-term yields for over a decade.
The expected outcome? The short end comes down. But lhe long end faces upward pressure – even if Warsh hopes it doesn’t rise materially. The curve risks steepening.
Regardless, from a policy standpoint, it would be a win for Warsh – he can tell the White House he delivered rate cuts, and he can tell inflation hawks he kept overall financial conditions tight.
But if market mechanics outweigh policy intentions, the net effect on the real economy could be tighter than the headline rate cut implies.
Whether the fed funds rate gets cut in the second half of 2026 or not, a Warsh-led push to reduce the balance sheet would likely exert independent upward pressure on long-term yields.
That means mortgage rates staying elevated… corporate borrowing costs staying elevated… and the valuation math on growth stocks staying pressured – all without Warsh touching the fed funds rate dial once.
Bottom line: The market is watching the rate decision – but it should be watching the balance sheet, because that’s where Warsh’s intentions and market realities are most likely to diverge.
We’ll keep tracking this as the Warsh era begins.
Have a good evening,
Jeff Remsburg
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