The Fed holds steady

The episode opens by framing what appears to be a dull week in central banking — the Fed, Bank of England, and ECB all held rates steady — but argues that significant drama is unfolding beneath the surface.

The biggest story is Jay Powell's decision to remain at the Federal Reserve as a governor (with a term through 2028) after his chairmanship ends, breaking an 80-year precedent. The hosts explain this in the context of the Trump administration having launched what they describe as a politically motivated criminal investigation into Powell over alleged Fed building cost overruns. When the DOJ dropped the case — but left open the possibility of reopening it — Powell declared that did not constitute the 'finality' he had demanded and announced he would stay on. The hosts argue this was a strategically sound move: it makes it harder for Trump to attack the Fed without it being seen as an attack on the institution itself, and it occupies a seat on the Board of Governors that would otherwise have gone to Trump appointee Stephen Miran, who had voted for a rate cut at this meeting. The net effect is that the Fed is now less dovish than it might have been under a fully Trump-shaped board.

On the Fed's actual policy decision, the hosts dissect a subtle but meaningful disagreement within the FOMC. While nearly all members voted to hold rates, three members wanted to remove a line from the official statement implying a loosening bias for future decisions. Powell defended keeping the statement consistent, framing Fed communications as an expectations management exercise where even minor wording changes carry significant market signals.

On the economic data front, US real GDP growth came in at 2% for Q1 — slightly above the estimated trend rate of around 1.5-1.7% — suggesting the economy is still growing. But inflation, measured by the PCE index, is running at 3% or above no matter how it is sliced, and this is before the full impact of tariffs has filtered through.

In Europe, eurozone inflation rose sharply to 3% in April from 2.6% in March, driven heavily by energy prices (energy inflation jumped to 10.9% annually). The ECB held at 2% with no urgency to move. The Bank of England also held at 3.75% but signaled readiness to act, with one member (Hugh Pill) already voting for a rate hike. The hosts note that the Bank of England's 'adverse scenario' of oil at $130 a barrel may not be adverse enough given current trajectory.

The episode closes with a broader reflection on central bank psychology: rate setters don't actually want to raise rates in response to energy-driven inflation, since higher rates won't make oil cheaper. Instead, they are engaged in a signaling game — trying to convince the public they are serious enough to act — in hopes of preventing inflation expectations from becoming self-fulfilling through wage demands and price hikes.