By Nick Timiraos
Kevin Warsh has been Federal Reserve chairman for two weeks. The bond market and the White House have already picked his first fight for him.
Friday's strong jobs report pushed traders to raise bets on a rate increase by year-end, drew a public warning from a Fed voter that higher rates could be warranted this summer, and prompted one Wall Street bank to forecast a series of hikes beginning in December.
Meanwhile, President Trump reiterated his longstanding frustration that investors treat strong economic data as unwelcome news because they expect the Fed to respond by raising rates. "With a great Jobs Report, like just announced, stocks should go up, not down," he posted on social media Friday. "Growth does not mean inflation!"
Stocks sold off, with the Nasdaq down more than 4%. In the current environment, good economic news pushes bond yields higher, and higher yields punish stock prices. Yields rose Friday because investors anticipated some combination of a Fed that raises rates, more persistent price pressures, or both.
Trump's top economist -- himself a finalist for the Fed job that went instead to Warsh -- went on television to argue the report showed the Fed could be cutting rates before too long.
The whipsaw illustrates the high degree of difficulty facing Warsh as he heads into his debut meeting as chairman this month. He looked poised to inherit a much different economy when Trump tapped him in January.
Back then, markets expected the Fed to cut rates as many as three times this year. Officials weren't sure the labor market -- which had absorbed a historic 1-point rise in unemployment without a recession -- would hold up without more help. And with labor demand cooling and inflation appearing to drift back toward the Fed's target but for tariff-driven increases, interest rates looked restrictive.
Four months later, nearly every piece of that picture has reversed. Hiring hasn't just stabilized but reaccelerated. The AI build-out is straining supplies of raw materials and electricity, a source of price pressure tied to a boom, not a slump.
And that's before accounting for the fallout from Trump's decision to strike Iran in February. The prolonged closure of the Strait of Hormuz to most commercial shipping has driven up gasoline and other commodity prices, with pump prices up nearly 50% since the start of the year.
The Fed's long-running debate over which risk to weigh more heavily -- a softening job market or firming prices -- is now being resolved in favor of inflation-fearing "hawks" who were skeptical of cutting rates at the end of last year.
Among them is Cleveland Fed President Beth Hammack, who dissented at the Fed's April meeting. She and two others said at the time that the Fed should ditch the language in its official statement that subtly suggested a rate cut was still more probable than a rate increase. The Fed is expected to hold rates steady at its June 16-17 meeting and to remove that language.
For now, Hammack said in a statement Friday, it is reasonable to hold rates steady. "But if recent trends continue, it may soon be appropriate to act," she said, using language that suggests she is prepared to push for a rate increase as soon as the Fed's subsequent meeting at the end of July.
A second Fed voter, Dallas Fed President Lorie Logan, earlier this week indicated she would support a rate increase later this year if current conditions persist.
Wall Street is starting to make the same shift. BNP Paribas on Friday became the first major bank to write rate increases into its year-ahead forecast, telling clients it expects the Fed to reverse all three of last year's quarter-point cuts in a series of hikes beginning in December.
Even economists who spent last year urging the Fed to cut are moving in a more hawkish direction. "The U.S. labor market has kicked into a higher gear," said Neil Dutta of Renaissance Macro Research in a note to clients Friday. He predicted that the Fed could move at its July meeting to signal the possibility that its next move will be a hike. Moreover, if the Fed hikes, he wrote, it won't make just one move.
The loudest objection to that logic is coming from the Trump administration, which badgered the Fed for steeper reductions than it delivered last year. A summer of rate-increase talk could push up mortgage rates and other borrowing costs just as Republicans head into November's midterm elections defending their record on the cost of living.
Senior administration officials in recent weeks have tried to soothe inflation jitters, arguing that higher energy costs will quickly fade once hostilities end in the Middle East.
Trump's top economic adviser moved to head off the hawkish turn with a warning on Friday. The hiring upswing isn't a textbook case "where you need to hike rates," said Kevin Hassett, the director of the White House National Economic Council. The opposite was true, he said on CNBC: The Fed "will have room as it watches the numbers to cut rates."
Hassett said the May jobs report showed an economy growing because its productive capacity is expanding and not because demand is running too hot. "This is a supply-side job number, which means you can have growth and low inflation," he said.
Trump installed Warsh expecting lower rates. At the swearing-in ceremony two weeks ago, the president said he wanted the new chairman to be "totally independent." Hours later, at a rally, he laid out what he hoped that independence would yield. "You get the interest rates down, everybody's going to be very, very happy," he said.
That two-step was on display again Friday. "I'm going to let Kevin [Warsh] make that decision," Trump said when asked about a rate cut at the next Fed meeting. Then he added, "I'd like to see lower interest rates."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
June 05, 2026 21:00 ET (01:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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