A Low Profile

The prediction markets had it right; the odds are 95% that Powell will stay on the Board for at least 3 months. His explanation, however, was “hawkish” because Fed independence must be guarded, especially against external legal attacks.

The market reacted accordingly, nudging rates up a few basis points. This is because even though Powell plans to keep a ‘low profile,’ staying on the Board to defend independence creates tension with political calls for rate cuts, which would be ill-timed given that the FOMC is looking to remove the easing bias.

Fed Watch Advisors Notes is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

So, the odds of Powell staying on jumped to 95%, and, with it, the 2Y yield rose toward 3.96% on the back of rising oil prices. Markets are saying Powell may say he will keep a low profile, but staying on for Fed independence reasons implies that rate cuts can only be justified by fundamental factors.

As such, the dissents against the easing bias in the Statement, which is “considering the extent and timing of additional adjustments to the target range for the federal funds rate,” could conceivably see new rate guidance at the next meeting (in June), as Powell said.

That was, in my view, a key hawkish signal and a potential setup for a future market rate hike. As such, rate cuts for 2026 are off the table, as Powell said it was unlikely to see further rate reductions. For 2027, the market’s original thinking was that rate cuts would resume next year as the Warsh chairmanship would be in full effect.

Now, small hikes have appeared on that horizon, in part due to Crude December 2026-December 2027 prices rising to three-year highs. Powell did not want to tie himself to the mast of gas price forecasting, but he underscored that supply shocks cannot be overlooked if the duration is persistent.

Finally, this was a hawkish press conference for the Treasury market: 2Y is up 9.5 basis points, and the 10Y hit a high of 4.4298%, up 6 basis points, resulting in a flatter, more bearish yield curve. The Fed LLM sentiment score is +0.9, indicating moderate hawkishness overall (see Table 1).

Powell set up the market for the possibility that the FOMC could tilt toward a hike by June into the summer, contingent on developments in the Gulf. Powell did not hold back with cautious language but was instead pragmatic, in his usual fashion, when Fed independence is at play. Yields are poised to break a bit higher, with 2Y > 4% and 10Y reaching 4.5-4.55%.

Fed Watch Advisors Notes is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.