Hot jobs report puts Fed cuts further out of reach as Chair Warsh faces policy tests
New Chairman of the Federal Reserve, Kevin Warsh, arrives during the swearing-in ceremony held in the East Room of the White House in Washington, DC, on May 22, 2026.
Aaron Schwartz | Afp | Getty Images
Another major jobs report in May largely sidelined the possibility of an imminent rate cut, and in the process underlined the difficult policy road ahead for new Federal Reserve Chairman Kevin Warsh.
The possibility of lowering interest rates was already on life support in Friday’s nonfarm payrolls report.
But the unexpectedly strong gain at 172,000, combined with sharp upward revisions in previous months, further weakens the case for policy easing, especially given the high level of inflation and uncertainty over the Iran war.
“If I’m there [Fed]I say, ‘Look, employment growth is good, we don’t need to support the labor market.’ Inflation is high,” said PNC chief economist Gus Faucher. “So we might keep the federal funds rate where it is right now until we get a better picture of what’s going on on the inflation front.”
As a matter of fact, market expectations changed further after the non-farm employment report. Traders priced the odds of a rate cut even lower at the June 16-17 meeting, increasing the odds of a rate hike by the end of 2026 to nearly 70% by noon on Friday, according to CME Group’s report. FedWatch It is a measure of futures prices.
But Warsh’s dilemma goes deeper than the simple calculation of where rates will go. A number of his colleagues are challenging not only the president’s positions but also the framework and filter through which policymakers interpret inflation, growth, and the appropriate stance of monetary policy.
Challenges from Fed colleagues
Numerous central bank officials have spoken publicly in recent days, anonymously challenging several key policy assumptions and positions that Warsh has held since his emergence as a presidential candidate.
There was Governor Christopher Waller express concern That consumer and market psychology are in danger of shifting inflation expectations higher is an important consideration when determining how the Fed should respond.
St. Louis Fed President Alberto Musalem embraced Warsh’s stated belief that artificial intelligence and its expected productivity gains would be an inflationary force on the economy. In its place, Musalem claimed“It would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today.”
Meanwhile, Dallas Fed President Lorie Logan defies Warsh’s trust About “truncated average” measures of inflation. These indicators do not take into account the highest and lowest inputs into inflation calculations and focus on readings near the midpoint of the data.
Warsh said the shortened average measures show inflation is much closer to the Fed’s 2% target than headline data; This is an important consideration at a time when rising energy prices are having a huge impact.
“A change in the mix of price increases and decreases causes too many price increases to fall below the trimmed average. This could pull the trimmed average below the underlying trend of inflation,” he said in a speech.
What makes Logan’s comments particularly noteworthy is that his own Dallas Fed produces the most-followed trimmed average measure, and Logan effectively warned against giving it too much weight. April average reading shortened We put inflation at 2.3 percent, well below 3.8 percent and the key indicator excluding food and energy of 3.3 percent.
“I am increasingly concerned that higher interest rates may be necessary later this year to fully restore price stability and appropriately balance both sides of the Fed’s dual mandate,” Logan said.
Warning about guidance
There were others too.
Governor Michelle Bowman defended this The Fed is not overreacting to the temporary price increase resulting from the energy supply shock. Bowman also stated that he was pleased that the Fed continued to use the “forward guidance” language in its post-meeting statement, which markets interpreted as a signal that the next rate move could be a rate cut.
Bowman’s attitude to language is both a boon and a challenge to Warsh’s; He supports lower rates but dislikes forward guidance as an unreliable indicator of future policies.
But he also added a note of caution about the war, saying, “The longer the conflict continues, the more we must consider the effects on inflation in our outlook.”
Finally, Chairman Michael Barr recently echoed Warsh’s advocacy for a smaller Fed balance sheet, insisting that such a narrow focus could cause more harm than good.
Warsh also faces challenges on Wall Street.
The new president, along with numerous White House officials, used the Fed under Chairman Alan Greenspan in the mid-1990s as a template for a central bank that sees a productivity boom as a disinflationary force against a hot economy.
But there are significant differences between now and then, according to Jason Thomas, head of global research and strategy at the influential Carlyle Group. In a recent client note, Thomas argued that real interest rates, or the difference between nominal rates and inflation, were much higher under Greenspan and therefore more restrictive, giving the Fed leeway.
The claim here is essentially that the Fed policy was tighter at that time than it is today.
“As Vito Corleone [of The Godfather] he asked his assembled guests: ‘How did things get this far?’ “This is the question Kevin Warsh should be asking his colleagues when he chairs his first Federal Open Market Committee meeting later this month,” Thomas wrote.
“Do not expect any action at this meeting or any further; the option value of waiting is too high given the extent of uncertainty brought about by the closure of the Strait of Hormuz,” he added. “But it is long past time to abandon the widespread easing that has characterized policy over the last two years.”
View from inside
Warsh, then, can be expected to face formidable challenges when the meeting convenes, albeit from a group known for its collegiality.
Cleveland Fed President Beth Hammack is one policymaker concerned about inflation. He voted against the April statement because it included forward guidance language and reflected concerns about using trimmed average and core inflation measures, with oil still above $90 a barrel.
Hammack asked in a recent public speech, “I told you my weight is great, I look really great right now. My diet is perfect except for the donuts I have for breakfast, the fried chicken I have for dinner, and the ice cream I have after that, but other than that I’m totally fine.” “You really have to think about everything.”
Hammack mentioned having a conversation with Warsh “a couple of weeks ago” and expressed confidence that “he’s really approaching the job with an open mind.”
“I think it comes down to asking some of those big picture questions. What’s going well? Where can we do better? How can we help support our goals of maximum employment and price stability, and how can we actually do that to serve the public?” he said. “I think he is a public servant who will come with an open mind and try to do the best he can.”
