Fed Keeps Interest Rates on Hold in Split Decision at Final Meeting of Powell Era

In an unexpectedly close split decision, Federal Reserve policymakers have decided to keep interest rates on pause in what is likely to be the final meeting under the supervision of Fed Chair Jerome Powell.

Powell joined the 8-4 majority on the Federal Open Market Committee to vote in favor of leaving the federal funds rate unchanged at Wednesday's meeting in Washington, DC, judging inflation as running too hot to justify a rate cut.

At a press conference after the vote, Powell revealed that he will remain on the board of governors as a regular member after his term as chairman ends, saying: "After my term as chair ends on May 15, I will continue to serve as a governor for a period of time to be determined. I plan to keep a low profile as a governor. There is only ever one chair of the Federal Reserve Board."

The decision leaves the Fed's benchmark overnight rate unchanged in a range of 3.5% to 3.75%, where it has stood since December. After cutting rates three times last fall, the Fed paused at January's meeting, and the outlook for future rate cuts is growing increasingly uncertain following the remarkable split decision Wednesday.

It marked the first time in 30 years that four or more voters have dissented with the majority, underlining the stark divisions on the panel as President Donald Trump's nominee Kevin Warsh prepares to take over when Powell's term as chairman ends.

Fed Gov. Stephen Miran, a notable "dove" who prefers lower interest rates, dissented in favor of a quarter-point rate cut, continuing his unbroken streak of dissents since Trump appointed him last year.

Stunningly, three other "hawkish" voting members supported holding rates steady, but did not support the statement issued with the decision, which they said should not include language suggesting the next move for interest rates will be a cut.

Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan instead believe a rate hike could just as likely be the Fed's next move. Their dissents may be intended to send a powerful message to Warsh as he prepares to take over.

The Fed's reluctance to cut rates has provoked the ire of Trump, who has demanded swift rate cuts since starting his second term. His nominee Warsh is expected to push for lower interest rates, but Wednesday's vote suggests that he will face challenges in swaying the FOMC majority to his view.

Powell to remain on Fed board of governors indefinitely

Powell's revelation that he will remain on the board of governors after May 15 also poses potential challenges for Warsh.

Although outgoing Fed governors usually resign from the board, Powell has the option to remain a regular governor until 2028. By remaining on the board, Powell denies Trump the opportunity to fill his seat.

Powell said Wednesday that he was choosing to remain until he felt confident that a Justice Department criminal probe into his testimony about renovations to the Fed's headquarters was fully, finally, and publicly concluded.

"I will not leave the board until this investigation is well and truly over with transparency and finality, and I stand by that," said Powell. "I'm encouraged by recent developments, and I'm watching the remaining steps in this process carefully."

Last week, federal prosecutor Jeanine Pirro backpedaled on her investigation, saying she had closed the case and referred the matter to the Fed's inspector general.

Powell, who has called the investigation unfounded and an attack on Fed independence, said he found Pirro's comments promising, but noted that she had threatened to reopen the investigation "should the facts warrant doing so."

"I'm waiting for the investigation to be well and truly over with finality and transparency. I'm waiting for that, and I will leave when I think it's appropriate to do so," Powell told reporters of Pirro's aborted probe.

Trump has threatened to fire Powell if he refuses to step down on May 15. The president's freedom to fire a Fed governor is currently under Supreme Court review, after Trump attempted to remove Lisa Cook.

Fed outlook and mortgage rates

The Fed does not directly control mortgage rates. Rather, it sets the short-term interest rate for lending between commercial banks.

The central bank uses higher interest rates to fight inflation and lower rates to stimulate the job market, in line with the Fed's dual mandate of price stability and maximum employment.

Although Trump has pushed the Fed for dramatically lower interest rates, the outlook for further rate cuts this year has dimmed significantly following the U.S.-Israeli war with Iran, which sent oil prices soaring and renewed fears of inflation.

Financial markets now project an 89% probability that the Fed's benchmark interest rate will be the same in December as it is today, according to CME FedWatch. It suggests investors believe inflation will remain hot enough to discourage any Fed rate cuts this year, even if Warsh were to take over as chair.

With the Fed on pause for the foreseeable future, the easing of geopolitical tensions may be more crucial for mortgage rates than any monetary policy decisions, says Realtor.com® Chief Economist Danielle Hale.

"As the ceasefire in the Middle East holds, interest rates and mortgage rates have begun to move lower," says Hale. "Despite the key decisions and upcoming leadership transition for the Fed, geopolitics is likely to be the bigger driver of mortgage rates in the near-term. For buyers and sellers hoping for favorable financing while making a move, a reduction in tension is likely to result in lower rates."

Developing story, more to follow.