Why Kevin Warsh Will Have to Defy Trump on Interest Rate Cuts

The Federal Reserve just released the minutes from the most recent meeting of its interest rate-setting committee, and they were not good news for Kevin Warsh, who will be sworn in as the newest Fed Chair tomorrow.

In fact, the minutes from the April 28-29 Federal Open Market Committee (FOMC) meeting indicate that Warsh, who President Trump nominated to start easing monetary policy through cuts to the Fed's target interest rate, will likely have to defy Trump on rate cuts.

Not only will the new Fed chief not be able to cut rates, but it's also looking increasingly likely that he will oversee a committee that is leaning toward hiking interest rates.

According to the Fed's summary of the April FOMC meeting, "a majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent." Policy firming is Fed speak for rate hikes.

Also, while the statement from that meeting contained language indicating an "easing bias" -- i.e., that the committee is leaning more toward rate cuts than rate hikes -- the minutes from the meeting indicate that many members of the committee would have preferred removing that language.

Inflation is likely to move higher in the coming months

Last week, the Bureau of Labor Statistics released April inflation data showing the Consumer Price Index (CPI) rose 3.8% year over year.

And inflation is almost certain to remain well above the Fed's 2% target for the foreseeable future. A survey of professional economic forecasters published last week by the Philadelphia Fed shows these economists expect CPI to surge to 6% this quarter, more than double the previous projection of 2.7%. So-called core CPI, which strips out volatile food and energy prices, is predicted to average 3.2% during the quarter, up from 2.8% in the previous survey.

As a result, futures traders now expect a rate hike this year. They currently price in a 61% chance that the Federal Funds rate will be higher at the end of 2026 than it is today.

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And while Warsh, as Fed Chair, will have the most important say on monetary policy, each of the FOMC's 12 members, including Warsh, gets exactly one vote on policy decisions such as rate cuts. The FOMC has never outvoted a Fed Chair on a decision regarding rates. But such a scenario is not out of the question this year if Warsh is determined to lower rates.

Only Warsh knows exactly how he plans to lead the Fed and the FOMC. But it seems unlikely that he would want to begin his four-year term by being the first Fed chief in history to be outvoted by the monetary policy committee.

What does it all mean for the stock market? The answer is mixed. Bond yields spiked in recent days as bond investors sold Treasury securities in reaction to surging inflation. A spike in yields can damage the economy and equity prices by making borrowing more expensive. If the Fed can act to curb inflation -- most likely by incrementally raising its target interest rate -- yields would likely come back down. But stocks don't tend to thrive when the Fed is in a hiking cycle, either.

One thing is certain: Warsh's job is going to be very difficult. And for the moment at least, it looks like he'll have to forget about what the president wants and consider the economic reality he faces.

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