Ominous sounds in the distance — The Federal Open Market Committee (FOMC) meeting came and went with little more than a yawn from investors, as the yield on benchmark Treasury notes barely budged Wednesday afternoon. Clearly, Federal Reserve officials had done their job of telegraphing the Fed’s disposition: Markets moved very little when the official statement was released, when Fed Chair Jerome Powell’s remarks were read, and when questions from the press corps were answered. But it doesn’t take a senior economist or seasoned journalist to interpret the Fed signals that there are ominous sounds of something coming—like the threatening sound of a train heading our way, akin to the 2003 country song “Long Black Train” by Josh Turner.
The FOMC kept policy rates unchanged, as expected. The dot plot (the aggregation of Fed officials’ forecasts for the federal funds rate) contained in the quarterly Summary of Economic Projections (SEP) showed that the 2025 median dot was unchanged, continuing to point to 50 basis points (bps) of cuts this year (Figure 1). However, the dot plot showed a hawkish skew in the committee, as only one dot made the difference between signaling one 25-bps cut and two cuts by year end. In addition, seven officials were in the “no cuts” camp in the June SEP, compared to four in March 2025, and one in December 2024. Also of note, as Figure 2 shows, the year-end 2026 dot increased to 3.6% (vs. 3.4% previously) and 2027 was 3.4% (vs. 3.1% previously).
At the same time, the Fed’s inflation and unemployment estimates rose. The core Personal Consumption Expenditures (PCE) Price Index estimate for 2025 moved higher (3.1% from 2.8%); ditto for the 2026 estimate (2.4% from 2.2%). Likewise, the unemployment rate estimate was revised up to 4.5% for both 2025 and 2026 from, respectively, 4.4% and 4.3%. Meanwhile, estimates for real GDP for 2025 came in at 1.4% (vs. 1.7% previously) and 1.6% for 2026 (vs. 1.8%).
Why hasn’t the Fed cut rates in 2025, like most developed-country central banks? As our Top Line alluded to, Powell gave a clear nod to the looming inflationary impact from the trade war, as well as the economic drag of uncertainty associated with the tariffs—just like the sound of a train headed our way.
“Ultimately the cost of the tariffs has to be paid and some of it will fall on the end consumer,” said Powell on Wednesday. “We know that because that’s what businesses say, that’s what the data say from the past.” Powell repeated the main theme of recent Fed speak when he added: “For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policies.” He also acknowledged that higher energy prices from Iran-Israel tensions, if they persist, give Fed officials a new threat to consider. But he also gave a nod to the Fed’s ability to pivot when he said, “No one holds these rate paths with a lot of conviction.”
Powell’s plight — Tariffs and inflation dominated concerns at the FOMC meeting, despite signs of a slowing economy. Powell also remained resolute in his mission, despite a barrage of insults from President Trump. “So we have a stupid person [leading the Fed],” posted Trump on Truth Social. “Europe had ten cuts, and we had none.” Later that night, for good measure, Trump posted that Powell is a “real dummy.”
But is Powell—whom Trump appointed to lead the Fed in November 2017—really the inflation hawk that the president’s fury would suggest? In fact, among Fed leaders, Powell is widely seen as neutral to dovish. For example, Figure 3 groups senior Fed officials along a hawk-dove spectrum, as compiled by Bloomberg Economics, based on public comments since the May FOMC meeting. The assessment gives particular weight to how each official framed risks from tariffs, inflation expectations, and the labor market. In Figure 3, Powell is graded as slightly dovish.
Powell’s current term as Fed Chair ends on May 15, 2026, while his seat on the Board of Governors extends to January 31, 2028. Given that Trump is unlikely to reappoint Powell, what’s the process for an individual to become Fed Chair? First, the president must nominate someone from among the sitting members of the Board of Governors. Next, the nominee goes through the Senate confirmation process, where they are vetted by the Senate Committee on Banking. Finally, the nominee is voted on by the full Senate. By not immediately filling Fed Governor Adriana Kugler’s seat when her term expires on January 31, 2026, Trump can therefore guarantee a vacancy on the Board—and, thus, the ability to nominate someone currently not on the Board as the next Fed Chair.
Per Bloomberg Economics, the top candidates to replace Powell are currently White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh, and Treasury Secretary Scott Bessent. Many analysts believe Bessent to be the front-runner, due to his proven loyalty to the President and his agenda. On the other hand, Fed Governor Christopher Waller—a Trump appointee who was previously not thought to be a top candidate for Fed Chair—became the first senior Fed official to publicly dispute the latest FOMC meeting messaging.
Waller said on Friday that he believes the Fed’s benchmark rate is 1.25% to 1.50% above the estimated neutral rate (i.e., the rate that is neither stimulative nor restrictive). “I think we got room to bring it down,” argued Waller. “And then we can kind of see what happens with inflation … We could do this as early as July.” These comments, which are reminiscent of Trump’s remarks during his Wednesday through Friday salvo against Powell, may be Waller’s attempt to vie for consideration to become the next Chair.
Trump, for his part, is clearly losing patience with Powell. On Friday, he suggested again that he may try to fire Powell, calling the Chair a “Total and Complete Moron” for leaving interest rates steady. “But regardless, his Term ends shortly!” the President added. The last time Trump talked of firing Powell, equity and bond markets sold off because investors worried that the Fed would become a money spigot for the White House, prompting Trump to back off.
The Supreme Court also ruled last month that the president can fire members of other independent federal agencies at his discretion, but not those at the Fed. The central bank is a “uniquely structured, quasi-private entity,” the Court ruled. As such, members of the Board of Governors, including the Chair, can only be fired “for cause.”
We think the most likely result of these developments is an early nomination of Powell’s replacement. Indeed, last October, Bessent floated the idea of naming Powell’s successor unusually early—thereby creating a “shadow Fed chair” who, without breaking any laws, could nevertheless undermine the sitting Chair by offering views more aligned with the White House. Trump, moreover, has signaled that he plans to soon announce Powell’s successor, even though such announcements are generally made only four to six months before the Chair vacancy opens.
As Charlie Garcia at Morningstar put it on Friday, appointing a shadow Chair would amount to telling Powell to shut up and stop steering—even though he is still officially in the driver’s seat. Jousting over rates is a classic Washington feud (albeit more played out in public today than in the past), explained Garcia, whereby the administration demands lower rates to boost the economy in the short run. “Trump champions lower interest rates because cheap money is every politician’s best friend,” wrote Garcia. “Businesses invest, consumers spend, and the government keeps rolling over its debts painlessly. Trump’s economic strategy is simple: Toss voters easy money, let the good times roll and then smile wide for the election-year selfies.”
“Powell, on the other hand, treats economic policy like a cautious dad reluctantly handing car keys to a teenager,” added Garcia. “He understands cheaper money promises a short-term thrill ride but inevitably leads to inflation—a monster that devours savings and credibility. His preference for patience and discipline may never win him popularity awards, but it does prevent economies from ending up overturned in a ditch.”
With the U.S. government’s bulging deficit and growing signs that the dollar and bonds are losing their luster with investors, we support keeping the car firmly on the road. If the Fed is no longer left free to pursue its dual mandate of full employment and low inflation, confidence in the U.S. financial system (and the corresponding value of its debt) will fall and rates will rise.
FROM THE DESK
Agency CMBS — The environment in our space was generally positive again last week, even though volume was impacted by the Juneteenth holiday on Thursday and the long summer weekend Friday enjoyed by many market participants. Fannie Mae spreads were flat to one bps tighter week over week, as all products continued to garner good demand. The story was better for Ginnie Mae MBS, as perm spreads were flat, week over week, and construction spreads tightened by over five bps.
Municipals — AAA tax-exempt yields were relatively flat throughout the yield curve, week over week. The municipal bond market took a breather last week, as new issuance slowed due to both the Fed meeting and holiday. We expect issuance to pick back up this week, however, with the calendar at approximately $11 billion—but still a far cry from the $17 to $19 billion weekly volume that came the previous few weeks. The housing sector continues to remain quiet with only a few deals pricing. Municipal bond funds had an eighth straight week of inflows at $110 million (year-to-date inflows of $5.91 billion), of which high-yield funds collected $57 million.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
