Blowout Jobs Numbers Just Made Kevin Warsh's Job Much Harder -- and Put a Showdown With Trump in Motion

Serving as the Federal Reserve Chair isn't easy. Kevin Warsh is already finding that out. And he hasn't even chaired his first Federal Open Markets Committee (FOMC) meeting yet.

Actually, Warsh's job just got much harder. The U.S. Bureau of Labor Statistics released its May employment numbers last week. Nonfarm payrolls rose to a seasonally adjusted 172,000, more than doubling the Dow Jones (the company, not the stock index) consensus estimate of 80,000.

This blowout jobs report makes it very difficult for Warsh to cut interest rates. Instead, it boosts the chances that a rate increase will be needed. An eventual showdown between the new Fed chair and President Trump now appears to be in motion.

Image source: Official White House Photo by Daniel Torok.

Putting the jobs numbers in context

Why would positive employment numbers make Warsh's job harder? Warsh would probably love to cut interest rates and make the president happy. However, like all Fed chairs, he must balance the Federal Reserve's dual mandate of maximizing employment and stabilizing prices.

When job numbers are weak, the Fed can justify lowering interest rates to stimulate the economy. But it can only do so when inflation is also under control, since a booming economy tends to drive inflation higher. Unfortunately for Warsh, the exact opposite of these two scenarios is currently unfolding.

Employment remains strong overall. Granted, job gains were heavily concentrated in two areas. Leisure and hospitality added 70,000 jobs in May, while local governments added 55,000 jobs. However, the Warsh-led Fed won't find much support for rate cuts in the latest data.

Meanwhile, inflation continues to rise. The Consumer Price Index (CPI) for April was 3.8%, well above the 2% level the Fed has historically targeted. The May inflation numbers are scheduled to be released on June 10 (after this article was written and published). If the CPI stays close to 3.8% or rises further, the pressure on Warsh to forgo near-term rate cuts will be intense.

CME Group's (NASDAQ: CME) FedWatch now projects a 98.2% chance that the FOMC will leave rates unchanged at the meeting next week. Furthermore, FedWatch estimates that the odds of a rate increase rise steadily throughout the rest of this year and into early 2027, topping 80% by March of next year.

A showdown in motion?

President Trump has made it clear that he wants rate cuts. He repeatedly criticized Warsh's predecessor, Jerome Powell, for not lowering rates quickly enough. The president stated at a rally just hours after Warsh was sworn in that everyone will "be very, very happy" if interest rates come down.

Did the strong May jobs report make President Trump more open to the possibility that rate increases may be necessary? Nope. He said in an interview with NBC's Meet the Press, "Nowadays when you have good reports, the market goes down because they think they're going to raise interest rates. There's no reason to raise interest rates."

The president also doubled down on his view about rate cuts, stating, "We should actually lower interest rates." He said, "Growth does not cause inflation."

NBC's Kristen Welker asked Trump if he would be upset if the Fed raises rates. He replied, "I'm-- I'm-- living with Kevin. I have a lot of respect for him, but my feeling is that when a country is doing well, they shouldn't be penalized by immediately raising interest rates."

However, Warsh could quickly find himself the object of Trump's ire just as Powell did if he doesn't go along with the president's wishes. And his desire to dramatically shrink the Fed's balance sheet could push interest rates higher regardless of the FOMC's actions.

Between a rock and a hard place

Warsh could advocate for cutting rates at the FOMC meeting next week. If he does so, though, he would go against the views of most economists, given persistent high inflation and better-than-expected employment numbers. He would also almost certainly be outvoted by other FOMC members.

A push for rate cuts would also likely be viewed as a capitulation to the president. Warsh probably doesn't want to be seen as weakening the Fed's political independence in his first FOMC meeting as chair.

On the other hand, President Trump doesn't pull any punches in verbally attacking those who oppose his agenda. Warsh's honeymoon period with the president could come to a grinding halt.

Maybe Warsh can avoid a near-term clash with the president by supporting leaving rates unchanged for now while giving lip service to potential rate cuts in the future. But if inflation remains high and the jobs numbers remain strong, Warsh will either face a showdown with the man who nominated him to his position or lose credibility with Wall Street.

Any way you look at it, the new Fed chair is caught between a rock and a hard place. Investors should be prepared for stock market volatility.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.