Fed expected to hold rates as Powell era nears end with Warsh on deck

The Federal Reserve will announce its latest interest rate on Wednesday when Fed Chair Jerome Powell will host what may be his final news conference as the leader of the central bank, with his term as chairman due to expire next month.

The Federal Open Market Committee (FOMC), the Fed panel responsible for interest rate moves, is widely expected to leave the benchmark federal funds rate unchanged at the current target range of 3.5% to 3.75% amid concerns about elevated inflation above the Fed's 2% target, which has risen since the Iran war began.

Powell's term as chairman is due to expire on May 15, although his term as a member of the Fed's Board of Governors runs until Jan. 31, 2028. The FOMC's next scheduled session after this week's meeting isn't until mid-June, after the conclusion of Powell's term as chair.

While Powell indicated he was prepared to remain the Fed chair on a temporary basis pending the confirmation of his successor, that may be unnecessary after a path cleared for the confirmation of former Federal Reserve Governor Kevin Warsh after a controversial investigation of Powell was dropped, potentially allowing Warsh to begin his chairmanship by the June meeting.

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There was uncertainty surrounding whether the nomination of Powell's successor would take place in advance of the Fed's June meeting due to the Trump administration's Justice Department investigating Powell's testimony on the central bank's costly renovation project, as the probe drew the ire of a key senator.

Sen. Thom Tillis, R-N.C., who serves on the Senate Banking Committee that has authority over Warsh's nomination, vowed to block his confirmation despite supporting his nomination due to his concerns that the administration was pursuing a "bogus" investigation that was undermining the central bank's independence over monetary policy.

U.S. Attorney for the District of Columbia Jeanine Pirro announced on Friday that she would close her office's investigation into Powell's Senate testimony on the Fed renovations, which have faced cost surges that the central bank has attributed to rising materials costs, asbestos mitigation and other unforeseen or higher-than-expected costs. Pirro said the Fed's inspector general, Michael Horowitz, will take over the investigation.

Tillis said the DOJ's probe was a "serious threat to the Fed's independence, and it needed to end before I could support Kevin Warsh's confirmation," adding that the inspector general probe is a "necessary and appropriate measure" that he's confident will be "conducted thoroughly and professionally."

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With the path opened for Warsh to be confirmed as chairman by the Senate in the near future, attention will shift to whether Powell intends to continue to serve as a member of the Fed's Board of Governors after the end of his chairmanship. 

Although most leaders of the central bank have departed the Fed at the conclusion of their terms as chair, Powell hasn't confirmed that he will follow that path and may remain as a governor.

At his news conference after the March FOMC meeting that left rates unchanged, Powell said he had "no intention of leaving the board until the investigation is well and truly over with transparency and finality."

"On the question of whether I will then continue to serve as governor after my term ends, and after the investigation is over, I have not made that decision yet, and I will make that decision based on what I think is best for the institution and for the people we serve," Powell added. "I'm not going to have anymore to say on those issues, by the way."

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EY-Parthenon Chief Economist Gregory Daco said that while the DOJ dropped its investigation, he anticipates that Powell is "more likely than not to remain on the board," explaining that the "rationale is institutional continuity, not politics."

Daco wrote that Warsh's views of inflation outcomes and a potential productivity surge driven by artificial intelligence could be disinflationary, and his views about how the Federal Reserve system operates could compel Powell to stay to "help preserve institutional continuity, anchor the existing communication approach, and provide a stabilizing counterweight during the transition."

"Dropping the investigation reduces pressure but does not eliminate it. The Inspector General review keeps governance questions active, and Powell remaining on the Board would not preclude the possibility of the DOJ reopening its investigation if new information emerges," Daco added. 

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"For now, the combination of a cleared confirmation path, a likely June transition, and a high probability of Powell remaining in place points to continuity in the policy framework, even as leadership evolves."