Middle East stasis set to keep Fed on hold at Chair Powell’s swan song in World Economy News 28/04/2026 Rate cuts remain more likely than hikes Absolutely nothing is priced in terms of Fed funds futures contracts for the 29 April Federal Reserve policy decision, but the market still leans in the direction of eventual rate cuts with around 10bp of easing priced by the end of the year. The Fed itself continues to have one 25bp rate cut within its March economic projections for 2026, while the consensus amongst economists remains a little more aggressive, predicting two 25bp cuts in the latter part of the year. We also continue to forecast two rate cuts this year, one in September and one in December. The main interest will be Jerome Powell’s press conference which, in theory, will be his last given his term as Chair ends on 15 May. As such, there will be questions over how he sees his legacy and his relationship with President Trump and whether he will choose to stay on at the Fed given his term as a Governor doesn’t end until January 2028. However, it may not actually be his last as Fed Chair. Until Republican Thom Tillis is satisfied that the Department of Justice’s “vindictive prosecution” of Jerome Powell, tied to the renovation of the Fed’s headquarters, has been brought to an end, the confirmation of Kevin Warsh as his successor will remain blocked at the Senate Banking Committee stage. Powell has already said he will stay on as chair “pro tempore”, which would only intensify tensions between the Fed and the President. In terms of the outlook for monetary policy, we are unlikely to get anything particularly revelatory. The minutes from the last decision suggested that the “vast majority” of the FOMC membership saw employment risks as skewed to the downside, while progress on inflation was likely to be slower because of the economic headwinds being generated by developments in the Middle East. This is likely to remain the way the committee assesses the situation with little prospect of any immediate change in policy signalled. Inflation likely to be transitory with the jobs markets still stalled In terms of inflation, it has been five years since either headline or core consumer price inflation were at or below the 2% target, and higher fuel and airline fares mean CPI looks set to break back above 4% imminently. The Federal Reserve can’t do anything to ease the current energy supply shock though. Instead, its focus is to ensure that inflation expectations remain contained and, for now, that seems to be the case. Hence the mildly hawkish rhetoric coming from officials. Importantly, the current supply shock, focused on fuel prices, is not as broad as the pandemic-related supply chain stresses in 2020/21, and we don’t have the same sort of demand impetus that would risk a broader, more persistent inflation story. Real household disposable incomes are already flatlining, so we see higher fuel prices as being demand destructive via reduced spending power. This is set to weigh on core inflation, and we also need to remember the importance of shelter costs within the US inflation basket (35.5% weighting for headline and 44% for core), which we expect to moderate further. Moreover, if Middle East tensions ease and oil prices drop back to below where they are today, there is a high probability of sub-2% year-on-year inflation being achieved in 2027. In terms of jobs, there are only 260,000 more people in work today than 12 months ago, implyin