As Kevin Warsh moves closer to potentially becoming the next Federal Reserve Chair, his future colleagues appear increasingly distant from former President Trump's desire to resume interest rate cuts. During what is expected to be outgoing Chair Jerome Powell’s final meeting, Fed policymakers voted nearly unanimously on Wednesday to keep interest rates unchanged. However, sharp divisions emerged regarding the future path of rates—three officials dissented against the policy statement’s wording, which still pointed toward possible future rate cuts.
Powell confirmed that he will remain on the Fed’s Board of Governors after stepping down as chair in May. This move will delay Trump’s opportunity to nominate a new governor more inclined toward rate cuts. Kevin Flanagan, Head of Investment Strategy at WisdomTree, commented, “If anyone expects Warsh to cut rates immediately upon taking office, they are likely to be disappointed. Economic data over the next six weeks or longer will determine whether the dissenting officials can shift their stance back toward supporting cuts.”
In an April 21 interview, Trump stated he would be disappointed if Warsh did not cut rates immediately upon taking office. Although Warsh has long hinted that there is room for rate reductions, he has not explicitly committed to urging his Fed colleagues to act as soon as he is sworn in. He may ultimately align with the majority of Fed policymakers, who currently view the present level of interest rates as appropriate. A sudden shift in economic conditions could, of course, compel the committee to act. But in the absence of clear data signals, Warsh will inherit a committee that is increasingly divided and resistant to cutting rates.
Since three consecutive rate cuts last autumn, the Fed’s policy statements have suggested that further reductions may eventually be appropriate. Yet, with inflation proving stubborn and Middle East conflicts driving energy prices higher, a growing number of officials are pushing to signal that the next policy move could just as likely be a rate hike.
Following the Federal Open Market Committee’s decision to maintain the benchmark interest rate in the 3.5% to 3.75% target range, Powell said on Wednesday, “Policy focus is shifting toward a more neutral stance, and markets are conveying a similar message.” Powell noted that most officials are not yet ready to send such a signal, but the dissenting votes indicate that the camp supporting a policy shift is growing impatient.
Priya Misra, Portfolio Manager at J.P. Morgan Asset Management, observed, “This is not only a message to incoming Chair Warsh, but also to the markets and the White House: the FOMC is a credible and independent democratic decision-making body. If Warsh wants to cut rates, he will need to persuade his colleagues.”
Powell’s decision to remain at the Fed further reduces the likelihood of near-term rate cuts. The outgoing chair indicated he plans to keep a low profile and does not intend to become a major obstacle for the new chair. His choice was largely motivated by concerns over “legal attacks on the Fed—threats that jeopardize our ability to conduct monetary policy free from political considerations.” Nevertheless, his continued presence after Warsh takes over could still influence policy. At a minimum, it prevents Trump from appointing a loyalist to the board.
Once Warsh’s nomination is confirmed, he will replace Governor Stephen Milan, who has dissented at every meeting since being appointed by Trump last fall, advocating for lower rates than his colleagues. Patrick Harker, former President of the Philadelphia Fed, stated bluntly, “Powell’s decision to stay essentially confirms that the Fed will not cut rates in the short term. The committee has clearly entered a wait-and-see mode.”
Even among those who agreed to retain the easing bias in the statement, few are in a hurry to cut rates soon. Several officials noted they need more time to assess how Middle East conflicts will affect the U.S. economy, while others expressed concern that soaring energy prices could exacerbate already elevated inflation.
Loretta Mester, former President of the Cleveland Fed, pointed out, “Ongoing Middle East conflicts, high oil prices, and volatile inflation indicators persist, while the underlying economy shows unexpected resilience. Previous market expectations that rising inflation or weak employment would force rate cuts have largely faded.”
Comments