Summary
In Time for New Fed Chief, Waning Chances of Rate Cuts On May 22, 2026, Kevin Warsh was sworn in as the 17th chair of the Federal Reserve (Fed). The Stanford University and Harvard Law graduate began his career on Wall Street in the mid-1990s on Morgan Stanley’s M&A desk. He became executive secretary of the National Economic Council during the presidency of George W. Bush and, in 2006, was nominated to the Fed’s board of governors. Serving as assistant to Fed chairman Ben Bernanke during the 2008 financial crisis, Warsh was involved in the Lehman Brothers Holdings Inc. bankruptcy, the sale of Bear Stearns Cos. to JPMorgan Chase & Co., and other deals. After leaving the Fed in 2011, he lectured at Stanford and filled various board roles. He is married to Jane Lauder, granddaughter of the founder of Estee Lauder Cos. President Donald Trump stated that Mr. Warsh will be totally independent in his role as Fed chair. But Chair Warsh was sworn in with the lowest number of Senate votes ever, reflecting skepticism that he will be able to guide policy based purely on economic fundamentals while navigating political pressures. During his first stint on the Fed board of governors, Mr. Warsh was regarded as an inflation hawk, or someone who prioritizes containing inflation over growing employment and the economy. In fact, Mr. Warsh was uncomfortable with Chair Bernanke’s proposed sale of $600 billion in U.S. Treasury securities, because he feared this level of quantitative easing would artificially suppress interest rates and lead to higher inflation. Regardless of any fealty toward the president, Mr. Warsh is now seen as an inflation dove, or one who prioritizes economic growth and full employment over keeping inflation at a specified level. Yet the new Fed chair may find his hands tied regardless of his beliefs, given the current economic and inflation environment. Inflation and Employment The war with Iran recently passed its 100th day. During the current truce phase, both sides are maintaining a low level of hostilities without quite crossing over into open warfare. More than 100 tankers per day passed through the Strait of Hormuz before the war; now, the daily total is in single digits. The immediate impact of the war was a spike in petroleum product prices. Those higher prices have begun to ripple across the economy in ways in which even economists cannot accurately predict. The April all-items Consumer Price Index (CPI) rose by 0.6% on a month-over-month basis and 3.8% on an annual basis. Core CPI for April, excluding food and energy, rose 0.4% monthly and was up 2.8% annually from April 2025. While the CPI was about in line with expectations, the Producer Price Index (PPI) sent interest rates soaring. The PPI for April 2026 showed a 1.4% increase from March and a 6.0% increase on an annual basis – the largest 12-month advance since December 2022. For PPI excluding food, energy, and trade services, the 12-month change through March 2026 was 5.2%, much higher than the 4.3% consensus call. Within the preliminary 1Q26 gross domestic product report, Personal Consumption Expenditures (PCE) Price Index rose 4.5%, up from 2.9% in 4Q25. Even though the Core PCE Price Index strips out energy along with food, core PCE prices rose 4.3% in 1Q26 after rising 2.7% in 4Q25. This metric is monitored by the Fed as part of its rate-setting deliberations. While the inflation news is bad and maybe getting worse, the employment situation is good and maybe getting better. May nonfarm payrolls exceeded expectations with a gain of 172,000, much stronger than consensus estimates of 85,000. April and March were both revised higher, and nonfarm payrolls averaged a monthly gain of 188,000 for March-May, compared with an average gain of 48,000 for February-April. The unemployment rate was 4.3% in May for a third consecutive month. Average hourly earnings for May grew 3.4% annually, down from 3.6% for April; annual wage growth has mainly been in the 3.5%-4.0% range for the past few years. Over that span, hourly workers could at least count on annual wage growth staying ahead of rising prices. Wage growth and inflation are now running at approximately the same pace. Unlike in recent months, the relatively low-wage healthcare sector did not dominate total employment growth. The best jobs growth in May was in leisure & hospitality and in local government; manufacturing grew slightly, as did construction and business services. The president’s tariff agenda is designed to restore good-paying manufacturing jobs, but so far, most growth in that area has been tied to preexisting initiatives such as the CHIPS and Science Act. If manufacturing and construction can accelerate from here, that is good news for the president’s agenda. Such progress would also argue against the need for additional stimulus in the form of rate cuts. Fixed Income Market Sees Lessened Likelihood of a 2026 Rate Cut Fixed income investors, economists, and market strategists came into 2026 expecting the Federal to cut the Fed Funds rate by 25 basis points (bps) or perhaps 50 bps over the course of the year. Most forecasts anticipated that any rate cuts would occur in the back half of the year. Circumstances have changed since then, and not only because of the war with Iran. The employment environment is much healthier than anticipated. The same can be said of corporate earnings, which were much stronger than expected for the calendar 1Q26 EPS season and show signs of carrying that strength across the full 2026 year. The Fed no doubt has also noted that the worsening inflation environment is pushing up market interest rates. The 10-year Treasury yield was 4.55% as of mid-June 2026, compared with 4.14% at year-end 2025. The two-year Treasury yield was 4.17% as of mid-June, versus 3.45% as of year-end 2025. The two-10 slope in the yield curve was 38 bps as of mid-June 2026 compared with 69 bps at year-end 2025 – which was the steepest two-10 slope since preinflationary 2021. The CME FedWatch Tool is regarded as the best gauge of investor sentiment for what’s ahead in Fed policy. Currently, this indicator reflects near certainty (96%) that the Fed will maintain the Fed Funds rate at its current tendency of 3.50%-3.75% at its mid-June Federal Open Market Committee (FOMC) meeting, the first to be helmed by new Chair Warsh. Things begin to get interesting across the back half of 2026, previously a period in which economists and investors anticipated one or two quarter-point rate cuts. By July, conviction that rates will hold steady has slipped to 82%, and investors see a 14% probability that the Fed Funds rate could go a quarter-point higher – mor
