With inflation heating up, growth holding firm and markets dialing back rate cut bets, the Federal Reserve heads into its April meeting under pressure for what is likely to be Chair Jerome Powell‘s last press conference.
Fed funds futures price a 100% probability that the Federal Open Market Committee leaves rates at 3.50%–3.75% on Wednesday and the first meeting where a cut becomes more likely than a hold doesn’t appear until October 2027.
Even by December 2026, markets assign only a 26% probability to a 25-basis-point easing as per Polymarket.
In short, the base case is no cuts for all of 2026.
That is a complete reversal from more than three cuts penciled before the war in Iran.
Powell’s Last Presser As Chair As Warsh Looms
Earlier this week, the Department of Justice dropped its investigation of Powell, clearing the path for Kevin Warsh‘s confirmation as the next Fed chair. Bond markets read the news as mildly dovish for late-2026 policy.
Goldman Sachs economist David Mericle pushed back, highlighting that the leadership transition is unlikely to affect policy decisions while uncertainty around the war remains high.
“Warsh and Powell have actually had similar views on inflation and interest rate policy, at least prior to the war,” Mericle said.
In his Senate testimony, Warsh highlighted the trimmed-mean measure of inflation, which has run lower than the core recently.
But Mericle noted that is partly because it strips out tariff-affected categories, similar in effect to Powell’s preference for citing core PCE inflation net of estimated tariff effects.
Same destination, different math.
Goldman raised its year-end 2026 inflation forecast to 3.4% headline PCE and 2.6% core PCE on the back of further increases in its commodities team’s oil price outlook.
The Setup Is Hawkish On Every Axis
Bank of America economist Aditya Bhave was direct in his April FOMC preview: “upside risks to inflation from the Iran war haven’t dissipated.”
Although the S&P 500 – as tracked the SPDR S&P 500 ETF Trust (NYSE:SPY) – is trading as though the war is over, gas remains above $4 a gallon and traffic through the Strait of Hormuz is still highly disrupted.
Uncertainty about the impact of the conflict on core inflation remains elevated.
Bhave expects headline PCE to jump to 3.4% year-over-year in March on the spike in gas prices. Core PCE is expected at 3.1% year-over-year, or 0.24% month-over-month. Both prints land Thursday.
Fed Doves Are Quietly Turning
The most prominent doves on the FOMC have shifted hawkish in recent weeks.
Governor Christopher Waller emphasized in a recent speech that the size of the labor supply shock means very little or no net job creation is necessary to keep the unemployment rate steady.
San Francisco Fed President Mary Daly went further, saying that holding policy unchanged all year would restrain inflation without hurting the labor market.
Bhave reads Daly’s base case as now a flat policy path for the year.
Even Stephen Miran, the most dovish member of the committee, said he is leaning toward three cuts this year rather than four because, in his view, the mix of inflation has worsened.
That dove-to-hawk drift is precisely why Bhave thinks Powell will lean into a hawkish tone in the presser:
“Powell is likely to sound hawkish in the presser… There is no reason to push back against market pricing of a flat policy path.”
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