The reasons for the Federal Reserve to cut interest rates are increasingly exhausted, and Warsh faces a tough situation taking over.

Release Time：2026-05-09

With the dual fundamentals of stable employment and rising inflation, the window for the Federal Reserve to cut interest rates is closing at an accelerating pace.

In April, non-farm payrolls increased by 115,000. Although the job market is not robust, it is stable enough to further ease the outside world's urgent expectation for interest rate cuts. In contrast, inflationary pressure has yet to ease. The consumer price index (CPI) rose by 3.3% year-on-year in March, far exceeding the Federal Reserve's 2% policy target. Moreover, data from the past three months show that inflation has not declined but has risen instead.

Market expectations tracked by Nick Timiraos, a Wall Street Journal reporter known as the "new Fedwire," show that an increasing number of institutions are delaying or even scrapping their predictions of interest rate cuts this year. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said on Friday that inflation has exceeded the target for five consecutive years and is increasingly reflected in service costs, which is worrying.

The pricing in the federal funds futures market is even more extreme - traders have almost ruled out the possibility of rate cuts before April 2031, and the interest rate curve even implies a probability of rate hikes in the coming years. Kevin Warsh, who is about to take over as the chair of the Federal Reserve, will have a hard time pushing through a rate cut agenda in a policy committee that leans hawkish.

Stable employment data eases pressure for interest rate cuts.

In April, non-farm payrolls rose by 115,000, although this was below the level of strong growth, it was sufficient to indicate that the labor market was stabilizing after previous fluctuations, thereby reducing the necessity for the Federal Reserve to boost employment through interest rate cuts.

Scott Clemons, chief investment strategist at Brown Brothers Harriman, said: "It's becoming increasingly clear that the Federal Reserve has plenty of patience. There are no economic factors that require them to cut interest rates further."

Dan North, senior economist at Allianz North America, shares the same view, believing that the recent data makes the Fed's decision to keep interest rates unchanged more reasonable and pointing out that the policy orientation may gradually shift in another direction within the next year.

Inflation remains stubbornly high, and hawkish voices are growing louder.

The issue of inflation is now at the core of discussions within the Federal Reserve. Goolsbee told CNBC on Friday that he is worried about the current inflation trend: "We have been above the 2% target for five consecutive years. Last year, there was no progress, and in the last three months, inflation has not declined but has risen instead." He warned that if the market widely expects inflation to fall back to the level of several years ago, the Federal Reserve will face a "dilemma".

Goolsbee also emphasized that inflationary pressure is no longer confined to single factors such as gasoline and tariffs, but is increasingly permeating service costs.

At last week's Federal Open Market Committee (FOMC) meeting, three regional Fed presidents dissented from the post-meeting statement. They did not object to the decision to keep interest rates unchanged per se, but rather to the "forward guidance" language in the statement that was widely interpreted by the market as hinting at a rate cut in the next step.

Lindsay Rosner, the head of multi-asset fixed income at Goldman Sachs Asset Management, said: "Since the labor market seems to be back on track, the Federal Reserve will shift its focus to curbing the upside risks of inflation. The FOMC is likely to remove the dovish bias in its post-meeting statement in June, which means that the hawks are temporarily in the upper hand in the committee."

"New York Fed's Fedwire": Half of the institutions no longer expect interest rate cuts this year

Nick Timiraos noted on social media that after the release of the April non-farm payroll data, an increasing number of sell-side institutions and Fed watchers are postponing or even scrapping their interest rate cut forecasts. He said that currently, half of the institutions predict that there will be no rate cuts this year, and given the strong inertia of such predictions, this proportion is likely to expand further.

Goldman Sachs has explicitly adjusted its forecast, pushing back the expected final two rate cuts by one quarter each to December 2026 and March 2027. The pricing in the federal funds futures market is even more pessimistic - according to futures pricing, traders have essentially eliminated any probability of rate cuts before April 2031, and the interest rate curve even reflects the possibility of rate hikes in the coming years.

This shift in market expectations reflects a fundamental reassessment of the outside world's judgment on the Fed's policy path: the question of interest rate cuts has evolved from "when will they come" to "will they come at all".

With Powell's succession imminent, the low-interest-rate agenda may be hard to advance.

The situation that awaits the incoming chair of the Federal Reserve, Warsh, is rather tricky. Trump nominated him for the position partly because he expected Warsh to push for lower interest rates. Warsh himself has also publicly expressed his preference for a lower federal funds rate and advocated that the Fed should shift its policy focus more towards reducing its balance sheet, which is as large as 6.7 trillion US dollars, rather than relying on the overnight interest rate, which is currently the main policy tool.

However, in the context of inflation exceeding 3%, promoting a rate cut will be a challenging task, especially given the current overall hawkish structure of the FOMC committee.

Dan North was straightforward: "The challenge he faces is quite formidable. He was clearly chosen by Trump for his preference for low interest rates. But when Warsh comes in, he will find that this internal game is far more difficult than he expected."

Wash had previously stated that he believed occasional policy differences within the Federal Reserve were healthy. But the current policy environment suggests that what he is facing may be far more than a typical "family squabble".

Risk Warning and Disclaimer Clause

The market involves risks, and investment should be made with caution. This article does not constitute personal investment advice and has not taken into account the individual investment objectives, financial situation or needs of any specific user. Users should consider whether any opinions, views or conclusions in this article are suitable for their particular circumstances. Any investment made based on this article is at the user's own risk.