News of the week summary - 03/05/2026

 Powell's final meeting produces the Fed's most divided vote in three decades

Wednesday brought Jerome Powell's last press conference as Federal Reserve Chair, and it was considerably more dramatic than expected. The Federal Open Market Committee voted 8-4 to hold the federal funds rate in its target range of 3.50 to 3.75 percent, the highest number of dissenting votes since October 1992. The split was itself unusual: three of the four dissenters did not object to holding rates but opposed language in the statement that retained a lean toward future cuts. They wanted the Fed to signal neutrality rather than an easing bias. A fourth dissenter, Governor Stephen Miran, went the other way, voting for an immediate quarter-point reduction.

The result exposed a committee pulled in two directions simultaneously. On one side, the energy shock from the Hormuz closure has pushed headline inflation above 3 percent and the Fed's own preferred gauge to 3.8 percent annually, with further increases expected as fuel costs filter through to goods and services. On the other, a prolonged supply shock is not the kind of inflation that rate hikes are designed to cure, and the committee majority was unwilling to commit to tightening into a shock that could fade if and when a diplomatic resolution is reached. Powell summarised the position plainly: the Fed was watching, waiting, and would not be rushed.

The meeting carried an additional dimension. Powell confirmed during the press conference that he would remain on the Federal Reserve's Board of Governors after his term as Chair expired, rather than vacating his seat. His successor, Kevin Warsh, whose Senate confirmation was advancing in parallel, would therefore take the seat of Governor Miran rather than Powell's own. The committee's centre of gravity, Powell noted, had shifted: more members now viewed a rate increase as equally likely as a cut. The June meeting, the first under new leadership, would inherit that tension.

The Bank of England sees its first vote for a rate rise since 2023

Across the Atlantic the same day, the Bank of England's Monetary Policy Committee voted 8-1 to hold Bank Rate at 3.75 percent, publishing its quarterly Monetary Policy Report alongside the decision. The single dissenter was Chief Economist Huw Pill, who voted for an immediate increase to 4 percent, making it the first vote in favour of a rate rise since the Bank's tightening cycle concluded in 2023. Until this meeting, every hold since December 2025 had been unanimous.

Pill's case rested on the structure of the energy shock. In his view, elevated energy prices create second-round effects in price and wage-setting that are likely to be more persistent than the initial supply disruption itself, and the risk of those effects was asymmetric to the upside. The majority took a different view: with a loosening labour market, weak consumer confidence, and private sector wage settlements largely completed before the conflict began, the conditions for a self-sustaining wage-price spiral were less favourable than in 2022. The Bank's central projection had CPI inflation at 3.1 percent in the second quarter, rising to 3.3 percent in the third and climbing further in the fourth before eventually returning toward target. Three separate scenarios in the Monetary Policy Report mapped out how the picture could unfold depending on the depth and duration of the energy shock.

The significance of a single dissenting vote should not be overstated. But the 8-1 split sent a clear signal that the committee was no longer united on the direction of risk, and that a further dissent, or two, at the June meeting could not be ruled out. Markets read it accordingly: sterling rose after the decision, while gilt yields fell as investors concluded that the economy's weakness would ultimately win out over the inflationary pressure.

The Bank of Japan cuts its growth forecast as energy costs squeeze the economy

The day before, the Bank of Japan had held its policy rate at 0.75 percent in a 6-3 vote, with three board members arguing for an immediate hike to 1 percent. The BOJ cut its growth forecast for the fiscal year 2026 to 0.5 percent from a prior estimate of 1 percent, and raised its core inflation forecast to 2.8 percent from 1.9 percent. Both revisions reflected the same cause: higher oil prices flowing through to import costs in an economy that buys almost all its energy from abroad.

Japan's position is particularly acute among energy-importing nations. The yen's persistent weakness, which has been pushing the exchange rate toward 160 against the dollar, compounds the cost of those imports by raising their price in local currency terms. Oil bought in dollars costs more when yen weaken, feeding domestic price pressures that the BOJ is already struggling to contain.

The US economy rebounded in Q1, though the composition raises questions

On Thursday, the Bureau of Economic Analysis published its first estimate of US economic growth for the first quarter of 2026. The economy grew at an annualised rate of 2.0 percent between January and March, a clear acceleration from the 0.5 percent recorded in the final quarter of 2025. The prior quarter's weakness had been largely caused by a 43-day government shutdown, and part of the Q1 rebound reflected federal spending and payrolls normalising as the government reopened. Business investment rose 8.7 percent annualised, driven by equipment spending and AI infrastructure.

The inflation picture embedded in the GDP report was less reassuring. The PCE price deflator, a broad measure of price changes across the economy, rose 4.5 percent at an annualised rate in the first quarter, the highest since 2022. Core PCE, excluding food and energy, rose 4.3 percent. These are quarterly annualised figures and therefore more volatile than the monthly year-on-year readings, but they confirmed that the energy shock was generating broader price pressure than headline inflation alone suggested. Consumer spending, which accounts for roughly two-thirds of the economy, grew at 1.6 percent annualised in the quarter, slower than the prior period, while the personal saving rate fell to 3.6 percent in March, its lowest level since 2022. Households were absorbing higher fuel costs by spending their savings rather than cutting back on consumption.

US PCE for March confirms persistent inflation

A day earlier, the Bureau of Economic Analysis had also released the March personal consumption expenditures data, confirming that the Fed's preferred inflation gauge stood at 3.8 percent year-on-year, up from 3.5 percent in February. Core PCE rose to 3.3 percent, the highest since late 2023. Personal income was broadly flat for the month, while spending rose 0.5 percent, an unsustainable combination that was reflected in the falling saving rate. Fed officials speaking through the week maintained a cautious tone: the data was not yet bad enough to force a hike, they suggested, but it was bad enough to rule out any cut.