Powell hands divided Fed to Warsh as 'integrity' speech caps tumultuous chairmanship

Federal Reserve Chairman Jerome Powell, in what was almost certainly his last press conference at the helm of the central bank, told reporters last week that "integrity is priceless" and warned that the Trump administration's "illegal attacks" on the Fed risked compromising the institution's ability to set monetary policy free from political pressure.

Powell's term as chairman ends on May 15. His successor, former Fed Governor Kevin Warsh, was nominated by Donald Trump in January and is expected to be confirmed by the full Senate before the central bank's June meeting. The Senate Banking Committee advanced the nomination last Wednesday by a 13-11 vote.

In a decision that has scrambled Fed politics, Powell announced he will remain on the Fed's Board of Governors after his chairmanship ends, citing the Justice Department's recent investigation of the central bank's renovation project. He declined to give a date for his departure from the board, saying only that he would step down once the legal threats to the Fed had been "well and truly over with finality and transparency."

The decision deprives Trump of an additional Fed seat to fill, denies the president a confirmable majority on the seven-member Board of Governors, and complicates Warsh's task of delivering the rate cuts Trump has demanded. Powell's term as a governor runs until 2028.

"It is so important for the economy, for the people that we serve, that they can depend, over time, on a central bank that operates that way free of political influence," Powell said. "It's part of the absolute foundation of this amazing economy that we have."

A divided FOMC

The Fed left interest rates unchanged at last week's meeting, maintaining the federal funds rate target range at 3.5 to 3.75 per cent. The decision was the third hold in a row after three quarter-point cuts in September, October and December. The 11-1 vote masked deeper divisions on the Federal Open Market Committee.

Trump-appointed Governor Stephen Miran was the lone dissent, voting in favour of an immediate quarter-point cut. Three other regional Fed presidents — Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas — formally objected to the inclusion of language in the policy statement signalling a bias toward future easing. The four total dissents were the most at any FOMC meeting since 1992.

Powell defended the divisions as evidence of "vigorous debate" inside the committee. "We're in an unusually difficult situation. We've really had four supply shocks — the pandemic, the invasion of Ukraine, the tariffs, and now Iran and the oil spike," he said. "Every supply shock has the capability of driving inflation up and unemployment up, and the central bank has a really hard time knowing what to do."

The economic backdrop has shifted sharply against Warsh in the four months since Trump nominated him. When Warsh was named in January, gasoline prices were near multi-year lows, the personal consumption expenditures inflation gauge was at 2.4 per cent, and there was no war in Iran. Today, the war has driven Brent crude past $110, the PCE gauge has jumped to 3.5 per cent, and California gasoline has crossed $6 a gallon — and the energy shock has rippled into sovereign bond markets across the West.

Markets price out a cut

CME Group's FedWatch tool, which derives implied policy expectations from federal funds futures, shows the probability of any 2026 rate cut at just 5.5 per cent. The probability of a rate increase by December has risen above 30 per cent, up from zero a week ago. Federal funds futures imply a December federal funds rate of 3.94 per cent — almost 20 basis points higher than today.

"This is a tricky situation for anybody, no matter who's coming in at this point," Stephen Kates, a financial analyst at Bankrate, told the Washington Examiner. "Inflation is accelerating, we've got conflicts abroad, we've still got some tail end of tariff impacts on goods prices."

Sean Snaith, an economics professor at the University of Central Florida, said Powell's continued presence on the board would be a complication for the new chairman. "It's not like one member of the board or the monetary policy committee can filibuster rate decisions, but I think it would be an awkward situation," he said.

There is little modern precedent for a Fed chairman to remain on the board after his term ends. Marriner Eccles, chairman from 1934 to 1948, declined to resign at the end of his term and stayed on the board until 1951. The Fed at the time was effectively subordinated to the Treasury Department and was attempting to reassert its monetary independence, a tension resolved only by the 1951 Treasury-Fed Accord.

Republican senators have urged Powell to leave the board entirely. "I am praying that he leaves the board," Senator Tim Scott of South Carolina told reporters. Treasury Secretary Scott Bessent, in a separate interview, said Powell's decision to stay "violates all norms" of Fed succession.

Powell's parting message

Powell's central message at his press conference was not about rates. It was about institutional independence. He cited a series of administration actions against the Fed, including the now-closed Justice Department investigation of the central bank's headquarters renovation, the ongoing attempt to fire Governor Lisa Cook, and statements from US Attorney Jeanine Pirro suggesting the renovation probe could be re-opened.

"My concern is really about the series of illegal attacks on the Fed which threaten our ability to conduct monetary policy without considering political factors," Powell said. "These legal actions by the administration are unprecedented in our 113-year history, and there are ongoing threats of additional such actions."

He emphasised that he was not objecting to "verbal criticism by elected officials," only to legal action. "I've never suggested that such verbal criticism is a problem," he said.

For Warsh, the chairmanship begins under conditions almost no central banker would choose. Inflation is accelerating, the economy is expanding fast enough to absorb higher rates, the labour market is tight, and the war in Iran has created a textbook supply shock. Warsh has not signalled a willingness to cut aggressively in the face of rising inflation, and Trump has yet to publicly soften his demand for steep, immediate easing.

"Between the higher budget deficits, the energy price spike, and the spillover effects that will have, that's made Warsh's job a lot tougher than it looked just a couple of months ago," said Ryan Young, senior economist at the Competitive Enterprise Institute.

For Powell, the closing line on his eight-year chairmanship may turn out to be the words he chose to deliver at his last press conference. "Integrity is priceless," he said.