- Powell leaves FOMC chair, stays Fed governor till Jan 2028; policy decision tensions likely.
- Data strong: ISM upbeat, 1Q retail double-digit, GDP tracking 3%+.
- Inflation risks up (energy/electronics); case to hold or even lean hawkish.
- Base case shifts: Fed to drop dovish bias, move toward neutral—not hikes yet.
- Forecast: we are removing the 2026 cuts; 2027 hikes possible if growth-inflation mix stays hot.
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Commentary: Next Fed move a hike?
Last week’s Federal Open Market Committee (FOMC) meeting to decide the course of US monetary policy was the last one under Chair Jerome Powell. He won’t disappear from the scene entirely though, as he has expressed a desire to carry on as a member of the Fed Board of Governors through the expiration of his term at end-January 2028. With Powell legally allowed to be in the FOMC till then, and several other members in the 12-person FOMC aligned with his views, a contentious set of Fed meetings are ahead. This is especially likely with forthcoming Fed Chair Warsh and current Trump-appointee Miran expected to push hard for policy accommodation.
What sort of data will confront the next meeting deliberations? Consider the widely followed purchasing managers’ survey released by the Institute of Supply Management. The April readings show an economy still very much on the march, with markers for production, new orders, inventories, and imports pointing to sustained demand growth. Labour market may be on the weaker side, inflation may be soaring, but economic activities are proceeding apace. Double digit retail sales growth in 1Q26 confirm this narrative. Atlanta Fed’s Nowcast point to 2Q GDP tracking at 3%+.
Strong consumer spending, a flat housing market, a decent investment cycle (though concentrated in tech), booming energy exports, and substantial upside inflation risks, driven by energy and electronics prices, characterise the US economy presently. These factors would point to keeping rates as they are, or could even justify moving into a hawkish stance in the coming months.
We have long maintained that 2026 would be marked by at least two 25bps rate cuts, on account of incipient weakness in the labour market and likelihood of financial market correction. The latter expectation stemmed from the various stock market over-valuation estimates. Those risks remain, but are offset by the present inflationary environment and robust economic growth. The Fed is not likely to move toward a hawkish direction soon, but removing its dovish bias and moving toward a neutral stance is on the cards, in our view.
Short of a dramatic and concrete resolution to the ongoing US-Israel war on Iran, inflation risks are unlikely to recede in the coming months. It is conceivable that under Chair Warsh, the Fed will find a way to convince the markets that headline inflation risks should be looked through as long as core inflation markers are stable (which they are, through March). But even that shift to neutral will displease President Trump, while any talk of possible hikes could be met with major challenges to Fed independence by the president.
Once mid-term elections are over, there might be further clarity on the balance of power in Washington, which could then pave the way for more independent decision-making. While Mr. Warsh is going to be reluctant to lead the Fed to a path of rate hikes, the data may force him in that direction. Assuming growth remains strong and price pressures don’t fade, 2027 could be marked by Fed rate hikes, in our view. As for our forecasts, we will remove the rate cut calls for this year, but not yet venture into rate hike calls for next year. Like the Fed, we would need more data for several more months before heading in that direction.
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