The Federal Reserve is quickly running out of reasons to cut interest rates

If the Federal Reserve still has reasons to cut interest rates in the near future, they are becoming increasingly difficult to find.

Friday’s April jobs report offered the latest evidence that the central bank’s real concern is not the weakening labor market but the increasingly difficult cost of living for ordinary Americans.

Last month’s 115,000 increase in nonfarm payrolls is hardly rogue, but it’s another sign that the employment picture is stabilizing at least enough to reduce pressure to cut interest rates.

By comparison, there is little evidence to say the same for inflation; That’s likely pushing the Federal Open Market Committee, which sets rates, toward a more hawkish stance where officials are comfortable staying where they are for a long time.

“The Fed will focus on containing upside inflation risks once the labor market gets back on track,” said Lindsay Rosner, head of multisector fixed income at Goldman Sachs Asset Management. “The FOMC may feel compelled to eliminate easing bias in its next post-meeting statement in June, which could indicate that the hawks have gained the upper hand over the committee for now.”

For the Fed, this means the cautious tone of multiple regional presidents could be even more effective.

At last week’s FOMC meeting, three of those chairmen voted against the post-meeting statement. The group did not appeal the committee’s decision to keep rates steady; instead, he objected to “forward guidance” language that signals the next move will likely be a discount.

facing inflation

“I’ve never been much of a fan of trying to use words in jaw-dropping policy decisions,” Chicago Fed President Austan Goolsbee said in a CNBC interview on Friday. He also said he was concerned about current inflation trends.

Goolsbee, who did not receive a vote in the committee this year but will receive a vote in 2027, added: “We have been above the 2 percent Fed target for five years. We stopped making progress last year and now it has been increasing instead of decreasing for the last three months.” “We need to be careful about that, because if everyone starts assuming that inflation rates are going to go back to something like they were a few years ago, we’re going to be in a bit of a difficult situation as a central bank.”

Goolsbee also argued that inflationary pressures are not just coming from gasoline and tariffs, but are increasingly showing up in utility costs. The consumer price index for March pointed to an inflation rate of 3.3%, well above the Fed’s 2% target.

The traditional approach to higher inflation and a stable labor market normally opposes cuts.

Recent data trends may lend credence to the argument that the Fed can continue to keep interest rates where they are while also keeping its options open, including a rate hike.

“This is the Fed’s [can have] “There’s a lot of patience in the world. There’s nothing on the economic front that would require them to cut interest rates any further,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman.

problem for warsh

Although market sentiment is changing rapidly, traders have ruled out any rate cuts through April 2031, based on Fed funds futures prices. In fact, the rate curve points to the possibility of a much stronger increase in the coming years.

“Obviously it makes the Fed’s decision easier,” Dan North, senior North American economist at Allianz, said of the latest data. “It just makes the decision a lot easier to make, and maybe next year we can start to tilt the bias the other way.”

But if that’s the case, things become problematic for new chairman Kevin Warsh, whom President Donald Trump sent to the Fed in anticipation of lower interest rates.

The former Fed chairman has been open about his preference for a lower funds rate, arguing that the Fed could still control inflation while easing policy. Warsh advocated an approach that focused on the central bank’s $6.7 trillion balance sheet rather than the overnight funds rate, which is currently used as the main policy tool.

But selling a rate cut with inflation above 3 percent will be a difficult task, especially given the tendencies of the current committee structure.

“He really has a lot going for him on this. He was definitely picked by Trump because he’s probably leaning towards lower interest rates,” Allianz’s North said. “Warsh comes in and says: ‘God, I think it would be great if we had a family fight once in a while.’ “I don’t think this is the fight he was expecting.”