U.S. Analysis

The April 29 FOMC meeting was largely expected to be a nonevent from a rate decision perspective and symbolic as it is likely Powell’s last meeting as Fed Chair after eight years in the seat. What garnered the most attention was not the decision itself – the Fed, as expected, held Fed Funds Rate steady at 3.50% to 3.75% – but the growing dissent within the FOMC as well as the unexpected announcement by Chair Powell that he plans to stay on as a governor. “After my term as Chair ends on May 15th, I will continue to serve as a governor for a period of time to be determined.” Chair Powell acknowledged that his initial intent had been to retire, but concerns surrounding Fed independence had nudged him to make this decision.

The Justice Department’s investigation into Chair Powell has been dropped, paving the way for the Senate Banking Committee to advance Kevin Warsh’s nomination as the next Fed Chair. But Warsh, once confirmed, faces an increasingly divided FOMC – one that remains concerned about Fed independence. Critically, Powell stressed the need for an independent central bank, one that is driven by consensus, not politics:

“Monetary policy is going to get made by…nineteen people.  There is a lot of stability there.  I mean if you think about it, every new Fed Chair has the same situation which is you’ve got eighteen colleagues on the FOMC.  Eleven vote during any year.  And your job is to create consensus.”

The growing dissent within the Fed is a better reflection of the risks faced by the US economy

The April decision was met with four dissents – the most at any single meeting since 1992 – with three of four committee members arguing for the removal of the easing bias from the statement. Importantly, this signals a more neutral approach for the Fed, and one that is better aligned to our interpretation of the US economy. Indeed, we have noted upside risks to both growth and inflation, but until this meeting, the prior “soft bias” in the Fed didn’t correspond with our view of a persistently tight labor market. As Powell noted in the presser:

“If you look at the unemployment rate it’s 4.3%. So that’s a low rate. That’s pretty close to mainstream estimates of the natural rate. We’ve been there for a long time.”

And the dissents are significant as they suggest more two-sided risks notably as the inflation backdrop looks increasingly sticky. The Fed is facing a significant energy shock layered on top of tariff pass-through that has yet to fully materialize. For the Fed, that means they will need to continue to wait and see how both impacts show up in the inflation data:

“For a long time we’ve been working on the hypothesis really that tariffs would lead to a one-time price increase and that would go away over time. In other words, there would be no further change…measured inflation wouldn’t reflect that higher level going up more and more…we really do expect that to be happening in the next two quarters. So we’re watching carefully to see what we thought all along would happen. That’s the critical part of the forecast. We need to really see that. With energy it’s so hard to say.”

Put simply, the shift towards two-sided risks is better aligned than a singular easing bias given the expectation for higher inflation.

The Fed has the benefit of a resilient US economy that is insulated from the energy shock

Many shocks were brought up in the presser, including Covid lockdowns, supply chain shocks, the regional banking crisis, trade disruptions, and multiple geopolitical conflicts – all of which did little to disrupt the growth of the US economy. More recently the US economy has shown continued resilience in the face of higher rates, tariff pass-through, and an oil price shock that remains the most potent risk. The consumer backdrop remains positive, albeit one that is increasingly driven by the upper income households.

Looking ahead, so long as the unemployment rate holds steady, consumers will have income to spend with the added benefit of tax returns that are providing a buffer to higher energy prices. Increasingly, many older and wealthier consumers are no longer relying on wage and salary income to fuel their consumption, instead relying on retirement income – Social Security, rent, and dividend income – all of which have outpaced wage growth in recent years. Additionally, business investment is expected to accelerate, in part due to the demand for data centers as well as the benefits of accelerated depreciation through OBBBA.

The Fed sees this momentum in the data, and it’s hard to justify further cuts when describing the US economic backdrop as such:

“Growth is really solid across our economy. Some of that is that consumer spending is hanging in pretty well. The most recent data are good. Some of it is just apparently insatiable demand for data centers all over the United States. So a lot of business investment going into building data centers and every reason to think that continues. So you’ve got an economy that is growing at two percent or better. PDFD, which is private domestic private purchases which is really a better signal of a momentum in the economy is higher than that. So that’s a positive thing.”

The current policy stance is well positioned to wait and see, and we expect they will remain on pause in 2026

Since the March meeting, we have seen the impact of the Middle East conflict impact headline inflation data while the Fed’s preferred measure of inflation – core PCE – remains stuck. Even if the Fed is focused on core PCE – which will likely see a slight reacceleration as tariff passthrough peaks – gasoline prices continue to influence consumer inflation expectations meaningfully. On the other side of the mandate, the upside to the March labor report reversed net job losses in February. And while the US economy has only added around 90K jobs over the past six months, the unemployment rate has held steady at 4.3%. 

As Chair Powell has said many times, there is no way to know with certainty where the neutral rate is, but he did reiterate his view that the policy rate remains in a good place – at the high end of neutral. And in the context of a growing economy, stable labor market, and sticky inflation, the Fed will need to remain in a wait and see stance:

“We really think our policy rate is in a good place.  If we need to hike, we will certainly signal that and we will certainly do it.  If we need to cut, then if it’s appropriate to cut we’ll signal the opposite.  I think because we feel like we’re in a good place to move in either direction, nobody’s calling for a hike right now.  So it really is going to depend on how things evolve.”

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About the Authors:

Mike Reid is Head of US Economics at RBC. He is responsible for generating RBC’s US economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a Senior US Economist  at RBC. Carrie is responsible for projecting key US indicators including GDP, employment, consumer spending and inflation for the US. She also contributes to commentary surrounding the US economic backdrop which she delivers to clients through publications, presentations, and the media. 

Imri Haggin is an US Economist at RBC, where he focuses on thematic research. His prior work has centered on consumer credit dynamics and treasury modeling, with an emphasis on leveraging data to understand behavior.

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