US – Fed preview: In a waiting mode

We expect the Fed to maintain its policy rates unchanged at the April meeting, in line with broad consensus and market pricing. We forecast the Fed resuming rate cuts in September, earlier than markets price in, but do not expect firm forward guidance at this stage.
Senator Tillis' decision to support Kevin Warsh's nomination as the new Fed Chair means, that the April meeting will be Powell's final one as the Chair. Powell could announce whether he intends to continue in the Fed Board of Governors until the end of his term (Jan 2028), or step down.
The Fed is likely to reaffirm its earlier guidance for slowing down Reserve Management Purchases (RMPs) of T-bills after April. We expect market reactions to be limited, but see risks skewed towards lower UST yields and weaker USD if Powell maintains the door open for cuts this year.

Danske Research Team Danske Bank A/S

With markets pricing essentially no risk for a policy rate change this week and with no new economic projections, Wednesday's main focus will be on Powell. And not just for policy reasons, but also as the meeting will most likely end up being Powell's last one as the Fed chair. He has not yet confirmed whether he intends to step down also from the Fed Board of Governors but could provide the guidance in the press conference. Powell's term as a Governor runs until January 2028.

Senator Thom Tillis confirmed he is ready to advance Kevin Warsh's nomination as the new Chair after Department of Justice announced it is ending the investigation against the Fed. On the Fed Board Warsh replaces Stephen Miran (the most dovish governor). But if Powell steps down, Trump could renominate Miran right back.

The Fed remains in a comfortable position to wait-and-see how the energy supply outlook evolves and how will the economy react. The latest available CPI data from March suggested that underlying core inflation pressures had remained well in check, and markets' longer-term inflation expectations have remained very steady.

Economic growth remains resilient but slowing. Atlanta Fed's Nowcast for Q1 GDP growth has declined to just 1.2% Q/Q AR from 3.0% two months ago. Part of the slowdown is linked to a rebound in imports amid lower tariffs, but estimates for private consumption have also declined. We think that lack of labour supply growth and tighter financial conditions will continue to weigh on growth towards H2, and pave way for resuming rate cuts in September and December (chart 1).

This week will not yet be the time for providing firm forward guidance. But as market prices in only cumulative 10bp of cuts by December, even cautious hints of resuming easing could trigger a move lower in UST yields and broad USD. We expect the Fed to reaffirm its earlier guidance for slowing down the pace of Reserve Management Purchases of T-bills after April. The purchases have already started declining after the April Tax Date, and are likely to stabilize below USD10bn per month, down from a recent pace of more than USD50bn per month.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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