Fed Chair Nominee Warsh May Face Pressure as Rate Cut Expectations Dim

Kevin Warsh, President Trump's pick to lead the Federal Reserve, may find it harder to deliver the interest rate cuts Trump expects as economic data shows continued strength. The International Monetary Fund now projects only modest room for rate reductions this year, while business leaders express growing confidence in the economic outlook.

WASHINGTON – Kevin Warsh, nominated by President Donald Trump to head the Federal Reserve, may find his ability to quickly implement interest rate reductions increasingly constrained as positive economic indicators emerge and central bank officials adopt a more cautious stance toward monetary policy.

The International Monetary Fund announced Wednesday that with anticipated U.S. economic expansion reaching 2.4% this year compared to 2.2% in the previous year, joblessness expected to remain around 4%, and price increases declining slowly, the central bank would have “only modest scope to lower the policy rate over the coming year” with just one quarter-point reduction.

Additionally, a recent Conference Board survey of chief executives revealed a significant increase in optimism regarding both the broader economy and individual industry prospects, with minimal expectations of major workforce reductions and companies planning to transfer costs from the Trump administration’s trade tariffs to consumers – factors that could complicate arguments for lowering borrowing costs.

Market participants have adjusted their predictions for when Warsh might initiate his first rate reduction, now anticipating action at the Fed’s July 28-29 session rather than the June 16-17 meeting. While his nomination awaits formal Senate submission, Warsh is anticipated to receive confirmation before the June gathering, as current Fed Chair Jerome Powell’s leadership term concludes in May.

The strengthening economic picture may benefit overall growth but could place Warsh in a similar predicament as Powell, with economic data and fellow policymakers favoring one approach while the administration advocates for another.

“The Fed’s reaction function has shifted slightly more hawkish,” wrote Natixis CIB economists Christopher Hodge and Selin Aker in their analysis, predicting the central bank might implement only two quarter-point rate reductions this year instead of their previously forecasted three.

The Federal Reserve’s upcoming meeting is set for March 17-18, when the Federal Open Market Committee is projected to maintain the benchmark interest rate within the 3.50%-3.75% range. Updated quarterly economic forecasts and rate projections will also be published following that session.

In December, Fed Governor Stephen Miran, formerly Trump’s Council of Economic Advisers leader, was the sole central bank official whose rate outlook aligned with the significant cuts Trump desires. Miran anticipated the Fed’s policy rate dropping to potentially the 2.00%-2.25% range by 2026, while his colleagues’ median projection suggested only one quarter-point reduction would be suitable.

Nearly three months afterward, following a robust January jobs report, Miran told Fox Business’s “Mornings with Maria” program Thursday that he maintains rates could decline by a full percentage point this year through four 25-basis-point reductions, preferably implemented quickly.

His perspective stems partly from expectations of a “profoundly disinflationary” artificial intelligence-driven productivity surge, a “supply shock” that Warsh has similarly indicated should permit lower rates.

“I really do not think that we have an inflation problem,” stated Miran, despite recent inflation measurements running one point above the central bank’s 2% objective. His governor term has technically concluded, but he may continue serving until a successor is appointed. Without another Board of Governors departure, Miran’s position would be required for Warsh’s eventual appointment.

Minutes from the Fed’s January 27-28 meeting revealed limited support for restructuring monetary policy based on AI optimism. Staff presentations indicated a small potential economic boost might be emerging – the “supply shock” Miran referenced, though in moderate amounts – while demand remains sufficient to maintain price pressures.

The minutes also noted surprising remarks that several policymakers considered the possibility that the next rate adjustment could be an increase. Furthermore, Fed Governor Christopher Waller, who joined Miran in dissenting for a cut during January’s meeting, stated this week that if recent strong employment growth continues, “it may be appropriate to hold the FOMC’s policy rate at current levels.”

The February U.S. employment report is scheduled for release on March 6.

A scenario combining persistent inflation, stable unemployment, and ongoing economic expansion would largely comfort Fed officials. Policymakers generally concur that inflation will decrease and expect the combination of modest job creation and minimal layoffs will maintain relatively steady unemployment. As long as this trajectory persists, and without indications that public inflation expectations are rising, there would be little incentive to take action beyond waiting.

This situation could create challenges for Warsh, who has presented arguments supporting rate reductions and must now work with a determined president who has publicly expressed expectations based on his nominee’s statements. Trump mentioned earlier this month that while he hadn’t requested rate cuts from Warsh, he believed his nominee’s intentions were clear.

Trump has repeatedly confronted Powell over presidential demands for substantial rate cuts, but said regarding Warsh last month: “I don’t want to ask him that question. I think it’s inappropriate … I want to keep it nice and pure. But he certainly wants to cut rates.”

The president also informed NBC News he had “not much” doubt rates would decrease. “We’re way high,” he stated. Trump, who has connected his lower rate advocacy to hopes of reducing federal debt financing costs and home mortgage expenses, has expressed minimal concern about inflation he believes has vanished.

Nevertheless, with current economic growth exceeding potential estimates and inflation showing minimal recent movement toward the Fed’s target, the central bank feels no urgency to reduce rates, especially not as dramatically as Trump or Miran have proposed.

Trump’s recent State of the Union address to Congress emphasized this contradiction, as he celebrated positive developments he attributes to his leadership and those anticipated ahead. Many analysts agree that combining fiscal stimulus through tax reductions, continued deregulation, and favorable credit conditions supported by last year’s Fed rate cuts could boost the economy – making additional borrowing cost reductions even less probable.