By Howard Schneider and Ann Saphir
WASHINGTON, Feb 26 (Reuters) – Federal Reserve chair nominee Kevin Warsh’s path to out-of-the-gate interest rate cuts in alignment with President Donald Trump’s expectations could be narrowing amid emerging bullishness about the U.S. economy, growing CEO confidence in the outlook, and investors keying off a hawkish shift among the central bank’s policymakers.
The International Monetary Fund said on Wednesday that with expected U.S. growth rising to 2.4% this year from 2.2% last year, the unemployment rate likely hovering near 4%, and inflation falling gradually, the Fed would have “only modest scope to lower the policy rate over the coming year” through a single quarter-percentage-point cut.
A new Conference Board CEO survey, meanwhile, saw a sharp jump in the outlook for both the wider economy and within each leader’s industry, with little sense that large rounds of layoffs were in the offing and firms passing through price increases from the Trump administration’s import tariffs – a combination that could make it harder to justify rate cuts.
Investors, meanwhile, have pushed back their bets on the timing of an initial Warsh-led rate cut, to the Fed’s July 28-29 meeting from the June 16-17 gathering. Though his nomination has not been formally submitted to the Senate, Warsh is expected to be confirmed in time for the June meeting, with current Fed Chair Jerome Powell’s leadership term ending in May.
The improved outlook may be good for the economy, but it could leave Warsh in the same bind as Powell, with data and his colleagues pulling in one direction and the White House pulling in another.
“The Fed’s reaction function has shifted slightly more hawkish,” Natixis CIB economists Christopher Hodge and Selin Aker wrote in a note, concluding the central bank could only make two quarter-percentage-point rate cuts this year, rather than the three they previously expected.
MIRAN SAYS BIG DROP IN RATES STILL POSSIBLE IN 2026
The U.S. central bank’s next meeting is scheduled for March 17-18, when its policy-setting Federal Open Market Committee is expected to hold the benchmark interest rate in the 3.50%-3.75% range. New quarterly economic and rate projections also will be released at the end of that meeting.
In December, the only central bank official with a rate outlook close to the steep cuts Trump wants was Fed Governor Stephen Miran, the former head of the Trump White House’s Council of Economic Advisers. Miran saw the Fed’s policy rate falling to as low as the 2.00%-2.25% range in 2026. The median expectation among Miran’s colleagues, by contrast, saw just one quarter-percentage-point cut as likely appropriate.
Nearly three months later, and after a strong January employment report, Miran on Thursday told the “Mornings with Maria” program on Fox Business that he still feels rates could fall a full percentage point this year through four 25-basis-point cuts, ideally sooner than later.
His outlook is partly based on his expectation for a “profoundly disinflationary” artificial intelligence boost to productivity, a “supply shock” that Warsh has also said should allow for lower rates.
“I really do not think that we have an inflation problem,” despite recent inflation readings a point above the central bank’s 2% target, said Miran, whose term as a Fed governor has technically expired, but who can continue to fill the job until a replacement is named. Absent some other departure from the Fed’s seven-member Board of Governors, Miran’s seat would be needed for Warsh to eventually come aboard.
WARSH FACES POSSIBLE DILEMMA
The minutes of the Fed’s January 27-28 meeting showed little support yet for relying on AI-optimism to recast monetary policy. Staff presentations suggested a small boost in the economy’s potential may be developing – the “supply shock” Miran has mentioned, but only in a measured dose – though with demand still strong enough to sustain pressure on prices.
The minutes also cited unexpected comments that several policymakers were open to the possibility that the next rate move could be a hike. In addition, Fed Governor Christopher Waller, who joined Miran in dissenting in favor of a cut at the meeting in January, said this week that if recent strong job growth is repeated, “it may be appropriate to hold the FOMC’s policy rate at current levels.”
The U.S. employment report for February is due to be released on March 6.
A combination of sticky inflation, a steady unemployment rate, and continued economic growth would in many ways be a comforting outcome for the Fed. Policymakers generally agree that inflation will decline and anticipate the combination of slow job growth and low rates of layoffs will yield a roughly steady unemployment rate. As long as that outlook continues, and absent any sense that public expectations about inflation are starting to shift higher, there would be little motivation to do anything other than wait.
Such an outcome could present a dilemma for Warsh, who has laid out arguments for why rates should fall and now will have to contend with a strong-willed and publicly demonstrative president who has taken the Fed chief nominee at his word. Trump said earlier this month that he had not asked Warsh to lower rates, but felt it was clear what his nominee would do.
Trump has clashed with Powell repeatedly over the president’s demands for deep rate cuts, but said of Warsh last month: “I don’t want to ask him that question. I think it’s inappropriate … I want to keep it nice and pure. But he certainly wants to cut rates.”
The president also told NBC News he had “not much” doubt rates would fall. “We’re way high,” he said. Trump, who has linked his call for lower rates to hopes of financing federal government debt more cheaply and lowering costs for home mortgages, has voiced little concern about inflation that he feels has disappeared.
However, with the economy currently growing beyond estimates of its potential and inflation showing little recent progress toward the Fed’s target, there’s no sense of urgency at the central bank to cut rates, particularly not as steeply as Trump or Miran have suggested.
Trump’s State of the Union speech to Congress earlier this week highlighted that paradox, as he trumpeted the good things that he believes have happened and those that are still to come. Many analysts agree a combination of fiscal stimulus in the form of tax cuts, ongoing deregulation, and the loose credit conditions supported by Fed rate cuts last year could spell upside for the economy – and make further reductions in borrowing costs all the less likely.
(Reporting by Howard Schneider;Editing by Dan Burns and Paul Simao)
