New Fed chair, same reality: Imminent rate cuts are unlikely, even if Warsh takes the helm

Kevin Warsh, President Donald Trump’s pick to lead the Federal Reserve, is now firmly on track to assume one of the most powerful positions in the global economy — and could advance an agenda that aligns with Trump’s desire for lower rates.

Still, even with Warsh at the helm, it won’t be easy to push interest rates meaningfully lower, something the president has made clear he wants, even joking that he would sue Warsh if he doesn’t cut rates.

But Fed officials typically lower borrowing costs if inflation is slowing, unemployment is rising (and at risk of climbing higher), or a combination of the two — neither of which is happening. That means there are now four obstacles standing in the way of a rate cut:

While the Iran war has pushed up inflation, the US economy is proving surprisingly resilient. That is allowing Fed officials to be prudent, waiting on the sidelines to see everything play out before making a call to raise or lower rates, as several of them have said in recent public speeches.

The Senate Banking Committee that approves Fed nominees is set to vote Wednesday morning on Warsh’s nomination. If confirmed to serve as Fed chair, Warsh would wield immense influence, controlling the agenda of every Fed meeting. But he would still be just one vote on the Fed’s 12-person rate-setting committee, which makes consensus-based decisions.

“Warsh is in the unfortunate position, through no fault of his own, to probably be the least influential Fed chair in a long time,” Christopher Hodge, chief US economist at Natixis CIB, told CNN. “He’s going to have a really hard time convincing the other members of the (Fed’s rate-setting committe) to cut rates quickly.”

Stubbornly elevated inflation

The latest figures on inflation and energy prices make it difficult for any Fed official to justify lowering rates before the fall.

The Consumer Price Index rose in March at its fastest monthly pace since 2022, pushing the annual rate to 3.3%, the highest in more than two years. The increase was largely driven by gas prices, which shot up by a record 21.2% during the month. The Fed’s overall annual inflation target is 2%.

Global oil prices continue to hover around $100 a barrel as the standoff between the US and Iran continues. That’s keeping US gas prices elevated, with the national average price of gasoline above $4 a gallon.

Fed Chair Jerome Powell and several other Fed officials have said any war-driven inflation will likely be temporary, subsiding by the end of the year. But the longer it takes for the Trump administration to broker a deal to end the weeks-long conflict in the Middle East, the longer it will take for the Fed to lower rates again — even if Warsh is put in place as soon as next month.

“For this year, we do not see the fact of a new Chair as changing the outcome” of two rate cuts, Morgan Stanley economists wrote in an analysis Monday. “Inflation risks dominate.”

Chicago Fed President Austan Goolsbee said in a speech earlier this month that it’s also possible the Fed may not cut rates until 2027.

Resilient consumers and businesses

A weakening economy at risk of deteriorating is sometimes enough of a reason for the Fed to lower rates. But that isn’t the case — at least for now.

About a third of companies in the S&P 500 have reported earnings for the first quarter, and the vast majority (84%) have beat analysts’ expectations, according to FactSet. Earnings results for the second quarter will be a better gauge of how US businesses fared during the Iran war, and those figures may turn out to be decent as well, for one key reason: Consumer spending, the backbone of the US economy, has been robust this spring, according to the latest data, despite Americans feeling unusually pessimistic about the economy.

Retail sales were up across most categories in March, according to Commerce Department data released last week. Excluding price spikes at gas stations, retail sales were up 0.6% in March from the prior month, down slightly from February’s 0.7%.

“The core activities of the economy continue to push along even with all the uncertainty,” Brian Moynihan, Bank of America CEO, said in an earnings call earlier this month.

A steady labor market

Over the past year, US job growth has been anemic as companies held off on hiring plans, feeling paralyzed by the seismic shifts in economic policy, including Trump’s sweeping new tariffs on all global trading partners.

The Iran war has become yet another source of uncertainty giving companies some pause. But none of what has happened since Trump began his second term, including the Iran war, has triggered a spike in layoffs. New applications for unemployment benefits rose 6,000 in the week ending April 18, to 214,000, squarely within a historically low range. The national unemployment rate has gradually moved up in recent years, but it remains low, at 4.3% as of March.

And the labor market’s worst days may actually be in the rearview mirror, according to an analysis by Oxford Economics released last week.

“The US labor market has entered a unique balance in the post-pandemic era,” said Henry Wu, co-head of US bond strategy at Alpine Macro, an Oxford Economics company. “The labor market may be in an upturn,” he said.

Warsh’s big changes

While Warsh may struggle to make a case for more than one or two rate cuts this year, his leadership would still likely usher in a new era at the Fed.

The Fed nominee in his confirmation hearing last week vowed for “regime change” at the central bank, if he’s confirmed, including potentially reducing the number of policy meetings each year and introducing a new inflation “framework.”

Since the 1980s, the Fed has met eight times a year to set interest rates, but is required by law to meet only quarterly. Warsh told lawmakers that four meetings a year “is not enough,” but did not commit to continuing with the tradition of eight meetings a year. It’s unclear if Warsh would need other Fed officials to agree with paring back the number of meetings.

Warsh also reiterated his long-held criticism that central bankers communicate too frequently, suggesting he might consider forgoing the post-meeting news conferences that became customary after every Fed meeting since former Fed Chair Ben Bernanke, though whenever he does address reporters, he said “it would be incumbent to hear what the reporters of the day had in mind.”