Kevin Warsh's Fed isn't cutting interest rates any time soon. But a hike isn't yet on the table, either.

MW Kevin Warsh's Fed isn't cutting interest rates any time soon. But a hike isn't yet on the table, either.

By Jeffry Bartash

Rising inflation is a big worry, but the economy might not be able to handle higher rates

New Federal Reserve Chair Kevin Warsh won't find it easy to cut interest rates as President Trump clearly wants him to.

The Federal Reserve isn't going to reduce borrowing costs any time soon because of resurgent inflation, but a rate hike is also off the table for now as the regime of a new Fed chair, Kevin Warsh, gets underway.

Wall Street investors are betting the Fed will raise rates this year, the FedWatch tool now shows, but not until its final meeting in December, after midterm congressional elections.

The catalyst for Wall Street's change of heart was a speech by Fed governor Chris Waller on Friday in which he said he "can no longer rule out rate hikes further down the road if inflation does not abate soon."

Waller was a driving force behind the Fed's three rate cuts in the second half of last year. At the time he argued a weak U.S. job market needed support, but what sealed the deal was a sufficient slowdown in inflation to give the Fed cover.

Waller is arguably the most influential Fed official right now with Jerome Powell's chairmanship having ended. Just one day into his job, Warsh hasn't had time to cultivate allies on the Fed board.

This "is a reminder that Waller's words carry much more weight [on the Fed] right now," even with Warsh having assumed the role of chair, said Neil Dutta, head of economics at Renaissance Macro Research.

Waller, who early this year had been considered a top contender to chair the central bank, joins a growing list of Fed officials who have recently ruled out a decrease in interest rates. He and others have said they support removing the central bank's current bias toward lowering rates at their next meeting, in June. It will be the first one presided over by Warsh.

The Fed's resistance to lowering rates poses a challenge to Warsh, who was chosen by Trump in large part because the president expected him to cut rates. Trump berated Powell ceaselessly for the past year and a half for not cutting rates more aggressively.

Yet Warsh is just one vote among 12 on the Fed board that sets the key U.S. interest rate - and he is clearly outnumbered.

Trump may have now recognized this reality, telling Warsh publicly this week to "do what he wants to do" and "be independent."

A majority of Fed officials has grown more worried about inflation after the conflict with Iran drove oil prices (BRN00) (CL00) sharply higher nearly three months ago.

The effect of higher gasoline prices, combined with the residue of the Trump tariffs, has pushed up the rate of U.S. inflation to a three-year high of 3.8% as of April, the consumer price index showed.

The Fed has been trying, but failing, for the past five years to reduce inflation to a 2% annual rate.

Why not raise rates now, then?

For one thing, the Iran conflict could end soon and cause oil prices to fall sharply. Inflation would also begin to taper off.

"The oil shock's effect on prices may dissipate soon, in which case raising rates may only begin to bite after inflation has started coming back down," Waller noted.

Richmond Fed president Tom Barkin, a pivotal centrist, also pointed out that higher interest rates aren't the best way to address temporary spikes in inflation.

"Raising rates to weaken demand doesn't address the root cause behind supply-shock-driven inflation," he said in a speech Thursday. "You wouldn't want to address a bird-flu-driven egg shortage by slowing demand across the economy."

The economy itself, what's more, could be more fragile than it seems, some Fed officials and economists say. Higher rates could slow the economy - or worse.

As a result, Fed officials are likely to wait and see how events unfold, especially with a U.S. election coming up. A rate hike before the vote would really put the Fed in Trump's crosshairs.

Fed officials have shied away from tangling with Trump, and they'll continue to do so. The state of the U.S. economy itself suggests a wait-and-see approach for the Fed.

"On net," Waller said, "my current policy position is to hold rates steady for the near term."

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May 23, 2026 09:00 ET (13:00 GMT)

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