FOMC preview: What comes after Powell and what should investors do?

The Federal Open Market Committee is not expected to change the fed funds target from a range of 3.50% to 3.75% at its meeting Tuesday and Wednesday, which will likely be the last one chaired by Jerome Powell.

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Analysts instead spoke about what they expect from Fed Chair nominee Kevin Warsh. José Torres, senior economist at Interactive Brokers, noted Wall Street expects Warsh to take “a dovish position,” since “yields plunged immediately following the news of the dropped Department of Justice investigation into” Powell.

The end of that investigation was to securing GOP votes needed to confirm Warsh.

Warsh, considered a hawk when he previously served as a governor on the Fed board, “essentially blamed the institution’s policy errors for contributing to price pressures that have exceeded the organization’s target for about five years and counting since the pandemic’s aftermath,” Torres said. “Is it reasonable to believe that, with accelerating cost pressures driven mainly by soaring crude oil prices, tariff passthroughs and robust consumer demand, a loosening of financial conditions is warranted as leadership transitions?”

The bigger question may be whether Powell will remain as a governor after his term as chair ends in May.

Joe Kalish, chief global macro strategist at Ned Davis Research, thinks Powell will stay, since “ending the DOJ probe wouldn’t meet Powell’s test of not leaving the Board ‘until the investigation is well and truly over, with transparency and finality.'”

The DOJ transferred the probe to the Fed inspector general and reserved “the right to file charges upon the completion of that investigation,” Kalish noted, so the investigation is not “well and truly over.”

The Fed will keep rates where they are but “stay laser‑focused on inflation risks tied to energy, geopolitics, and supply shocks,” said Luis Alvarado, co-head of global fixed income strategy at Wells Fargo Investment Institute.

No rate cut talk is needed “while inflation risks remain asymmetric,” he said. “Warsh’s Senate testimony reinforced that message. He emphasized Fed independence is paramount, avoided dovish signals, and made clear that policy credibility comes before easing.”

So fixed-income investors should view 2026 as “an income-driven year, not a capital‑gains year,” Alvarado said. “Locking in quality income matters more than betting on interest rate moves.”

In this environment, he said, “intermediate‑duration, high‑quality bonds start to look more compelling than cash or money markets.”

Still, Subadra Rajappa, head of research at Societe Generale, expects rates to stay at current levels all year although with an easing bias.

“Treasury yields remain near the highs of their recent ranges, indicating that inflation expectations and fiscal concerns remain top of mind for bond investors,” she said.

With no end to the hostilities in Iran in sight, or signs of a deeper impact on the economy from the conflict, Rajappa said, “the optimistic view in risky assets continues to be at odds with the more cautious tone of the bond markets.”

The U.S. Treasury 2s5s and 2s10s curves should “retain a flattening bias,” Rajappa said, while the belly of the curve will “remain attractive.”

The Fed “will focus on the balance of risks,” according to BNP Paribas. “With the U.S. now into its sixth year of 2%-plus inflation, a reopening of the Strait of Hormuz still elusive and greater concern among Fed policymakers about the stability of long-term inflation expectations, upside risks to inflation will likely be perceived as an increasing concern.”

And the labor market has made a dramatic turn “giving way to relative optimism that employment has been running stably in line with labor force growth and will continue to do so,” BNP said.

As a result, BNP sees the panel adjusting “forward guidance toward a symmetric bias,” with rate hikes and cuts “equally plausible next steps for monetary policy.”

That move, not necessarily suggesting a rate hike, would signal commitment to the inflation target and might reduce the risk of long-term inflation expectations “becoming de-anchored in an environment where (despite considerable uncertainty) a further period of above-target inflation now looks likely,” BNP said.

Should the Strait of Hormuz remain closed, a hike could be considered in June, BNP said, but their base case is no movement all year.

Following Warsh’s confirmation testimony, BNP believes he is committed to a 2% inflation target and “maintaining the Fed’s institutional credibility.” Also, BNP said, “monetary policy will continue to be determined by the economic outlook and by the FOMC’s existing policy goals and strategy.”

FHN Financial Chief Economist Chris Low expects an “uneventful” meeting because Fed members are “nearly unified” to leave rates unchanged based on opinions stated since the prior meeting, while “Powell is transitioning into an interim role as Fed caretaker as the end of his term approaches. He will not want to step on the incoming Chair’s toes unless it is unavoidable.”

Since it is likely Powell’s final meeting as chair, “it could result in a lost opportunity,” Low said. “With policy pretty much settled, this two-day meeting offers a rare opportunity to tackle something big, but secondary, on the Fed’s agenda. For two years, the FOMC has been so busy managing policy, it has not had time to hash out the communication overhaul long contemplated by the chair, including his vision of a new SEP.”

The quarterly is produced based on a compilation of the individual economic projections of FOMC meeting participants.

Since this week’s outcome is given, policy discussion will be limited, which offers the panel “the perfect opportunity to hash out the SEP discussion, if Powell still had the will to lead it,” Low added. “Yet, at the March meeting, when a reporter asked him about a new SEP, Powell suggested he has no expectation of any such change this year. He has given up on the project, leaving it to his successor.”

As for Powell, Low thinks “he will retire, but he has not yet committed to it. If he does retire, President Trump can appoint another governor to the board, and while he has not indicated who he might appoint, Stephen Miran is a likely choice since Warsh will be appointed to his seat.”

“With the Fed expected to hold steady, municipal investors’ focus should shift to the long-end where municipal-to-Treasury ratios still look unusually attractive,” said Tom Kozlik, head of public policy and municipal strategy at HilltopSecurities.