Fed holds rates at 3.75% in divided vote, erasing 2026 cut expectations

The Federal Reserve held its benchmark interest rate at a range of 3.5%–3.75% for the third straight meeting, but a hawkish shift in its forward guidance has extinguished market hopes for rate cuts for the remainder of 2026. The decision was marked by the highest number of dissents since 1992 and an unprecedented announcement by Chair Jerome Powell that he will remain a governor after his term ends.

“It probably means it will take [incoming Chair Kevin] Warsh a little bit longer to build the consensus he is trying to build,” said David Seif, chief economist for developed markets at Nomura.

The Federal Open Market Committee’s decision Wednesday was widely anticipated, with traders pricing in a 100% probability of a hold, according to the CME FedWatch tool. More significantly, the committee's statement and Powell's subsequent remarks prompted markets to completely price out the two quarter-point reductions that were expected for 2026 at the start of the year. The move put downward pressure on gold and strengthened the U.S. dollar.

The decision lays bare a deep rift among policymakers and sets the stage for a contentious period of leadership transition. Powell, whose term as chair concludes May 15, said he would remain on the board to defend the institution's independence from political pressure, creating a "two Popes" scenario that could complicate the agenda of his successor, Kevin Warsh.

Powell's Unprecedented Move

In a move not seen since 1948, Jerome Powell announced his intention to remain on the Federal Reserve board as a governor after his chairmanship ends. He cited "unprecedented" legal attacks and political pressure from the Trump administration as a threat to the central bank's independence, which he argued is essential for setting monetary policy for the public good.

“I’m waiting for the investigation to be well and truly over with finality and transparency,” Powell said at a press conference, referring to a probe into the Fed's building renovations. His decision denies President Trump an immediate opportunity to fill another seat on the seven-member board.

A Divided Committee

The meeting produced four dissents, underscoring the sharp divisions on the 12-member rate-setting committee. Three officials—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—dissented in favor of removing the statement's reference to potential future cuts. A fourth, Governor Stephen Miran, dissented in favor of an immediate rate cut.

This level of public disagreement is highly unusual and highlights the challenge Warsh will face in building consensus. The dissents from the regional Fed presidents could renew tensions with the White House, which has previously criticized them. Beth Ann Bovino, chief economist at US Bank, said the dissents demonstrated that Fed policymakers are “very independent” and will likely be on hold for months longer.

Economic Crosscurrents Muddle Outlook

The Fed faces a difficult and murky economic picture. Inflation has jumped to 3.3%, a two-year high, pushed up by rising gas prices as Brent crude trades near $111 a barrel. This makes it difficult for the central bank to justify rate cuts.

At the same time, hiring has nearly ground to a halt, which would typically argue for looser policy. However, with layoffs remaining low and the unemployment rate declining to 4.3% in March, many Fed officials believe the labor market is not weak enough to warrant rate cuts to spur spending. Consumer expectations are also flashing hawkish signals, with 62.8% of respondents in a recent Conference Board survey expecting rates to rise over the next year, the highest share since August 2023.

This article is for informational purposes only and does not constitute investment advice.