April 2026 Fed & Rates Call Update

Powell last FOMC dance suggests a further delay in the normalization process amid ongoing uncertainty

• FOMC Meeting Recap: The Fed kept overnight rates unchanged again at the third FOMC meeting of 2026. While the April FOMC statement was not outright hawkish, three hawkish members came forth dissenting on forward guidance language. In our view, although the “additional adjustments to the target range” language remained intact, chair Powell suggested the center of the FOMC is shifting away from the current easing bias during the press conference.

• That said, the Fed is still fundamentally in a wait-and-see mode (especially amid gauging the impact of the Iran war). There were some hawkish signals by Powell where he stated that the oil-driven inflation shock hasn’t peaked yet and that the Fed wants to see behind the “back side” of the energy shock before considering the idea of returning to rate cuts. But there was a dovish counterbalance to inflation, with Powell emphasizing the growth risks from gas prices, suggesting that higher fuel costs are likely to reduce disposable income and slow consumption and GDP.

• Overall, in his final press conference as chair, we characterize it as a measured and balanced tone message. Powell also proclaimed that he will not step down until all the legal risks involving the Fed are fully resolved with “transparency and finality,” and used the moment to defend the institution’s role and independence and stressed the importance of nonpartisan policymaking.

• Fed View Update: An increasingly divided Fed, that will see new leadership at the June FOMC meeting, makes it difficult for us to hold our initial view that the Fed will cut rates as early as July. We are still of the view that the Fed is mildly restrictive and that is having an adverse effect on small-to-midsized firms, housing and other interest rate sensitive sectors. The longer rates stay above neutral, the more impact it has on the jobs markets. The economy is now facing its fourth supply shock this decade and that will result in the Fed being more cautious before acting.

• We now expect incoming chair Warsh to spend the first couple meetings, and then at the Jackson hole symposium, making the case as to why the US needs to lower the cost of funding (to encourage growth in US manufacturing - in a world where inflation is held in check via AI productivity). This would pivot markets and price cuts back into 2026 at the September and December meetings. Overall, we have reduced one cut from our forecast horizon but still call for a lower path into year-end.

• Though the war in Iran and higher oil prices are having a potent effect on headline inflation, longer-term inflation expectations remain anchored and the passthrough into core prices is expected to be mild. We view global demand destruction as a result of the war to eventually spillover into the US economy as the primary risk factor, where growth should slow more significantly, limiting pricing power and inflation risks. In our view, a weaker growth outlook supports further Fed easing.

• US Rates Forecasts: There are several factors keeping things in limbo when determining the most appropriate path for rates (like hawkish dissents, a less dovish posture for the rest of the FOMC, and new leadership that has stated the need for lower rates, all amid an uncertain geopolitical and economic backdrop). However, unless financial markets experience an acute phase of tightening and/or the war inflation effects fade quickly, it’s more challenging to see imminent cuts at this point. Therefore, we have shifted our rate forecasts up by 12.5-25bps across the curve at various points for the forecast horizon to reflect a Fed that will be on hold for longer. 

Source: MUFG US Macro Strategy