Rate cut right after taking office? The market has already killed expectations before Waller even starts

Source: Jintou Data

The path for Federal Reserve chairman nominee Kevin Warsh to follow Trump’s expectations and cut interest rates at the start of his term is narrowing, due to the increasingly optimistic US economic outlook, rising CEO confidence, and investors’ focus on the central bank policymakers’ hawkish shift.

The International Monetary Fund stated on Wednesday that, with US economic growth expected to rise from 2.2% last year to 2.4% this year, unemployment possibly hovering around 4%, and inflation gradually falling back, the Federal Reserve will “only be able to moderately lower policy rates” over the next year, possibly with just one 25-basis point rate cut.

Meanwhile, a recent CEO survey by the Conference Board showed that CEOs’ outlook for the overall economy and their own industries has improved significantly, with almost no sign of large-scale layoffs, and companies are passing on the increased costs from Trump administration import tariffs—this combination of factors could make the case for rate cuts even harder to justify.

At the same time, investors have postponed their bets on the timing of the first rate cut under Warsh’s leadership from the June 16–17 meeting to the July 28–29 meeting. Although his nomination has not yet been formally submitted to the Senate, Warsh is expected to be confirmed before the June meeting, as current Fed Chair Powell’s leadership term ends in May.

An improving outlook may be good for the economy, but it could land Warsh in the same predicament as Powell: the data and his colleagues point in one direction, while the White House pulls in another.

Economists Christopher Hodge and Selin Aker from Natixis wrote in a report: “The Fed’s reaction function has shifted slightly hawkish.” They concluded that the central bank is likely to cut rates only twice by 25 basis points this year, instead of the three times they previously expected.

Milan Says Significant Rate Cuts Still Possible in 2026

The Fed’s next meeting is scheduled for March 17–18, where the policy-making body, the Federal Open Market Committee (FOMC), is expected to keep the benchmark rate in the 3.50%-3.75% range. New quarterly economic and interest rate projections will also be released at the end of that meeting.

In December last year, among central bank officials, the most dovish outlook on rate cuts—closest to what Trump wanted—came from Fed Governor Milan, who previously served as the chairman of Trump’s White House Council of Economic Advisers. Milan expected the Fed’s policy rate to fall to the 2.00%-2.25% range in 2026. By comparison, the median expectation of his colleagues indicated that just one 25-basis point rate cut might be appropriate.

Nearly three months later, after a strong January jobs report, Milan told Fox Business Channel this Thursday that he still believes rates could be cut by a full percentage point this year through four 25-basis point reductions, and ideally, the sooner the better.

His outlook is partly based on his expectation that artificial intelligence will have a “profound disinflationary effect” on productivity, which is a kind of “supply shock.” Warsh has also stated that this should create conditions for rate cuts.

Milan said: “I really don’t think we have an inflation problem,” even though recent inflation readings are a full percentage point above the central bank’s 2% target. Milan’s term as a Fed governor has technically expired, but he can continue to serve until a successor is appointed. Unless someone leaves the Fed’s seven-member Board of Governors, Warsh would ultimately need Milan to vacate his seat to take office.

Warsh Faces Potential Dilemma

Minutes from the Fed meeting held January 27–28 show there is currently little support for relying on AI optimism to reshape monetary policy. Staff reports indicate that economic potential might be experiencing a small increase—the “supply shock” Milan referred to—but only in a moderate dose. However, demand remains strong enough to keep pressure on prices.

The minutes also mentioned an unexpected comment that several policymakers were open to the next rate move being a hike. In addition, at the January meeting, Fed Governor Waller, who joined Milan in voting against a rate cut, said this week that if strong job growth appears again soon, “it may be appropriate to keep the FOMC’s policy rate at its current level.”

The US jobs report for February is scheduled to be released on March 6.

Persistent inflation, stable unemployment, and continued economic growth—these three together would be a reassuring outcome for the Fed in many ways. Policymakers generally believe inflation will decline and expect that slowing job growth and low layoff rates will together keep unemployment roughly stable. As long as this outlook continues and there are no signs that public inflation expectations are rising, there is little motivation to do anything other than wait.

Such an outcome could create a dilemma for Warsh. He has previously outlined reasons why interest rates should fall, but now he will have to deal with a determined and outspoken president who believes the Fed chairman nominee will do as he says. Earlier this month, Trump stated he hadn’t asked Warsh to cut rates but thought it was clear what his nominee would do.

Trump repeatedly clashed with Powell over demands for steep rate cuts, but last month, speaking about Warsh, he said: “I don’t want to ask him that question. I don’t think it’s appropriate… I want to keep a good and pure relationship. But he certainly wants to cut rates.”

Trump also told NBC News that he had “no doubt” rates would fall. “Our rates are too high,” he said. Trump linked his call for rate cuts to hopes for cheaper financing for the federal government and lower mortgage costs, showing little concern about inflation, which he believes has already disappeared.

However, given current economic growth exceeding its potential estimate and recent limited progress toward the Fed’s inflation target, the central bank feels no urgency to cut rates—especially not to the extent suggested by Trump or Milan.

Trump’s State of the Union Address to Congress earlier this week highlighted the paradox, as he touted what he saw as the good things that have happened and are about to happen. Many analysts agree that fiscal stimulus in the form of tax cuts, ongoing deregulation, and the easy credit environment supported by last year’s Fed rate cuts could mean further economic upside—which makes it less likely that borrowing costs will fall further.