Investors drop bold Fed rate-cut signal to Warsh

Is Kevin Warsh going to be a markets-friendly Fed Chair?

In one word, yes.

But not in the short term, investors agree.

They hope that the “regime change” Warsh promised during his nomination process will keep the U.S. economy as resilient as Warsh’s 18 new colleagues at the central bank say it is.

And that includes Fed interest-rate cuts.

But those assumptions are dependent on an end to the three-month Iran War that will cause energy price spikes to reverse and reduce inflation risk as a barrier to lower interest rates.

Warsh took over the Chair role on May 22 — the same day the Dow closed at a record high. But bond yields are rattling upwards and inflation forecasts are rising due to surging oil prices as the Iran peace process drags on.

This is sparking signals from some Fed officials and many analysts, plus Wall Street banks, to suggest that the policy-making Federal Open Market Committee will reverse earlier assumptions of rate cuts in the short term and consider the strong possibility of interest-rate hikes as soon as the end of the year.

This is definitely not what President Donald Trump was expecting when he nominated Warsh in January after a months-long campaign to find someone the president would see as a loyal Fed Chair who would follow his monetary policy agenda, which included slashing the benchmark Federal Funds Rate to 1% or less.

WEBs Investments CEO Ben Fulton said, “the markets are absorbing the hawkish tones,’’ stemming from the central bank — especially from the minutes of the April FOMC meeting released May 20 showing a definite shift of policymakers toward possibly tightening the cost of short-term borrowing in light of spiking inflation data.

“The bond market is definitely showing signs that higher yields are required for the new narrative from the Fed,’’ Fulton told TheStreet in an email interview.

“This is a baptism by fire for the historically dovish Kevin Warsh,’’ Fulton said. “Hopefully soon, we will see the Iran conflict be resolved, which should reduce some of the inflationary tones we are now experiencing.’’

Trump to Warsh: ‘Don’t look at me’

Trump nominated Warsh, 56, after months of highly vocal criticism of former Chair Jerome Powell for not leading policymakers to approve drastic rate cuts in the benchmark Federal Funds Rate to 1% or less. The Federal Funds Rate controls short-term borrowing costs from Main Street to Wall Street.

The president was adamant that the next Chair respond accordingly, and expectations were high when Warsh was nominated that the former Fed governor and Wall Street veteran would do exactly that.

Then the Iran War erupted.

Warsh, who said he did not discuss rates with Trump, has campaigned for lower interest rates, a smaller Fed balance sheet, and a shift in communications strategy from forward-looking guidance.

He also promoted the importance of Fed independence from executive authority.

Warsh told the audience at his swearing-in ceremony at the White House May 22 that he was committed to leading a “reform-oriented Federal Reserve.”

Neither he nor Trump mentioned interest rates.

The president did set out to dispel expectations that Warsh would be, as some administration critics have said, his “sock pocket” to do Trump’s bidding and destroy the independence of the world’s largest and most influential central bank.

“I want Kevin to be totally independent,” Trump said at the GOP star-studded ceremony in the East Room of the White House. “Don’t look at me. Don’t look at anybody.”

Fed’s mandate requires a tricky balance

The Fed’s dual mandate from Congress requires maximum employment and stable prices.

• Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.

• Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.

Fed held rates steady in historic April vote

The FOMC, in a decisive 8-4 vote on April 29, held the benchmark Federal Funds Rate at 3.50% to 3.75%.

It was the first time in more than 30 years the FOMC vote reflected four dissents, three of which objected to language in the post-meeting statement that did not reflect the possibility of easing a restrictive stance due to inflation.

It was the FOMC’s third pause after cutting rates by 75 basis points during its last three meetings of 2025 to boost a weakening labor market.

Related: Fed officials double down on blunt rate-cut message

The next FOMC meeting, Warsh’s first as Chair, is June 16-17.

The widely-respected CME Group FedWatch Tool is predicting a near 100% probability that the central bankers will vote to hold rates steady then and, as I’ve reported, a 43% chance of a rate hike at the December meeting.

Warsh is a proponent of lower interest rates

Eric Diton, President & Managing Director at The Wealth Alliance, said “the Fed is clearly becoming more cautious, even more hawkish,” due to its inflation concerns tied to both energy prices and tariffs.

Despite these headwinds, the market has remained relatively resilient while the interest-rate signals from the Fed feel like “higher for longer,” Diton told TheStreet in an email interview.

“Even worse, the Fed also pointed to the risk of slower growth tied to inflationary pressures, effectively referencing stagflation without saying the word,’’ Diton said.

“Warsh, who is a proponent of lower rates due to the increased efficiencies he sees ahead from AI, will have his work cut out for him to get the Fed to agree to lower rates, given this environment,’’ Diton said.

He added “Of course, an end to the Iran conflict would take some upward pressure off of energy prices and ease at least one of the root causes of the recent inflation spike.”

Warsh won’t compromise Fed independence

Warsh inherits the highest 10-year Treasury note yield (4.56% as of the May 22 close) of any Fed Chair since 1987, on the back of massive fiscal deficits, according to John Luke Tyner, Head of Fixed Income and Portfolio Manager at Aptus Capital Advisors,  

“As far as Warsh’s position goes, we know Fed chairs are often challenged by markets in their early days,’’ Tyner told TheStreet in an email interview.

Tyner quashed expectations that Warsh would lead the Fed into following political and bipartisan monetary policy.

“While many like to label him as Trump’s point man for lower rates, I think that is a dangerous presumption of his congressionally confirmed position,’’ Tyner said.

Warsh has “substantial experience and while he does want Fed reform, it will take time and buy-zin from other members’’ on the FOMC, he added.

Warsh will follow an innovative but data-driven path, according to Tyner:

“Should we question the need for Fed reform following a stint of five years of above-target inflation and a cumulative effect on prices affecting the American people?

“I do not believe the Fed is ‘compromised’ or Warsh will bend the knee to cut rates at Trump’s direction, especially in a backdrop of inflation risks ticking higher.’’

Related: Another top Fed official resets rate-cut bets

This story was originally published by TheStreet on May 24, 2026, where it first appeared in the Fed section. Add TheStreet as a Preferred Source by clicking here.