The Federal Reserve's (Fed) decision was closely watched by the markets. In fact, the markets weren't expecting a change in interest rates. However, given that this was Chairman Powell's last meeting and that rising energy costs were negatively impacting the inflation outlook, the communication from the board was crucial. The board kept the policy rate stable at 3.50-3.75%, in line with expectations. The board's statement emphasized increased uncertainty. While maintaining optimistic expectations for economic growth, the board highlighted the decline in new job opportunities in the labor market. Regarding inflation, it appears that concerns have increased somewhat. The volatility of energy prices due to the war in the Middle East was emphasized, further increasing economic uncertainty. In this environment, it seems that the majority of members preferred a wait-and-see approach.

In statements following previous Fed meetings, the board's "downward bias towards interest rates" was noteworthy. This trend was maintained in the latest meeting. However, three members expressed reservations about this communication. While inflation is trending upwards and inflation expectations are deteriorating, it appears that these members did not approve of the central bank's communication leaning towards easing. Therefore, while these members voted to keep the policy rate unchanged, they opposed forward communication. Only one member voted for a rate cut. Such a degree of disagreement among Fed members is unusual. Therefore, it seems that there will be more stress regarding reaching a consensus in upcoming meetings. On the other hand, the opposition of some members to communication regarding rate cuts has weakened the likelihood of future rate cuts.

Fed Chairman Powell chaired his last monetary policy meeting. His post-meeting statements resonated more than the rate decision itself. First, Powell announced that he would remain on the board for an indefinite period after his term as chairman ends on May 15th. He emphasized that he would remain on the board until the investigation into him is definitively and transparently concluded. This is unusual. The last time a chairman remained on the board after his term ended was in 1948. Powell stated in the Q&A session that he would not be a shadow chairman, indicating a more passive stance.

Following the announcement and statements, a limited increase was observed in US 10-year Treasury yields. The US dollar also depreciated against the euro. I can say that the decision did not have a significant impact on US stock and gold prices. It appears that the new Fed Chairman will be Kevin Warsh. Warsh's approach to Fed policies suggests that structural changes in Fed policies may occur in the coming period. First, Warsh argues that the Fed needs to shrink its balance sheet. In the last 20 years, the Fed has expanded its balance sheet twice. The first was with the financial crisis that began in 2008.

The second occurred during the pandemic. Warsh's argument is as follows: When the Fed begins to shrink its balance sheet, interest rates in the market will begin to rise. To balance the tightening of financial conditions, the Fed will be forced to lower interest rates. In other words, both interest rates will fall and the Fed's bloated balance sheet will weaken. This approach seems theoretically feasible. However, it is unclear what the effects will be on the financial products market, which has become quite complex in the last 30 years. Therefore, if Warsh undertakes this experiment upon taking office, he will be taking a significant risk. It is important to emphasize that timing will be crucial in taking this risk.

Creating new uncertainty in markets already under stress due to the war means taking an extra risk. Warsh's other approach is based on communication policy. Complaining that Fed members communicate too frequently and inconsistently with each other, the presidential candidate advocates for a more selective communication policy. Instead of communicating after every meeting, he seems to prefer a policy of "communicating when he has something to say." In short, the change of leadership at the Fed will become a new source of uncertainty for the markets. How will the new chairman manage the disagreements among the members? Will he be able to persuade members to take steps on issues such as communication and balance sheet reduction? We will have to wait and see.