The White House gave Kevin Warsh an unofficial mandate when he was put in charge of the Federal Reserve: Find any excuse to lower interest rates. The problem for Warsh is twofold.
First, the economy hasn’t cooperated, holding up better than expected given the war with Iran and surging energy prices. As a result, the bond market has gone from pricing rate cuts to pricing increases before the year is out. The second is that even before Warsh has had a chance to lead his first monetary policy meeting, President Donald Trump has sent him a clear message: “There’s no reason to raise interest rates,” he told NBC’s Meet the Press . “We should actually lower interest rates.”
This seems an impossible situation for Warsh. After all, he can’t please both the financial markets and his ultimate boss at the same time, right? Maybe he can, if the government’s monthly inflation report released Wednesday is any barometer.
The consumer price index for May came in hot at 0.5% , according to the Bureau of Labor Statistics, bringing the annual rate of inflation to 4.2%, the highest since early 2023. Fed policymakers worry more about the core gauge, which strips out volatile items such as food and energy; it rose 0.2%, half of April’s gain.
This takes some heat off as Warsh heads into his first Federal Open Market Committee meeting next week. He can please both constituents by claiming that the economy is performing well while also, with a straight face, saying that inflationary pressures are receding, and the central bank is under no immediate pressure to tighten monetary policy. “The FOMC has plenty of capacity for patience during the next several meetings,” the interest-rate strategists at BMO Capital Markets wrote in a research note after the CPI report.
Warsh wouldn’t even be out of line suggesting that rate cuts remain on the table. That’s because the central bank closely monitors inflation expectations or what the public and financial markets think will happen to prices going forward. And the bond market is becoming less worried that high energy prices will seep into the rest of the economy. Derivatives tied to where traders are betting inflation will be in two years have dropped to levels that accompanied Fed rate cuts last year.
To be sure, this is no goldilocks inflation report. The reasons why core inflation is tamer raise some concerning questions about the health of consumers, whose spending accounts for about two-thirds of the economy. Bloomberg Economics points out that much of the softness in the core measure is tied to lower spending on discretionary services, which suggests households are pulling back on nonessential items. We’re seeing disinflation in categories such as new cars, auto parts and household furnishings — all items that consumers typically cut back on first when times get tough. Not only that, growth in average hourly earnings is no longer keeping up with inflation, with so-called real wages falling by 0.7% in May from a year earlier, the most since early 2023.
Combined with a rapidly falling saving rate , rising debt levels and collapsing consumer confidence , evidence has mounted in recent months that households may be at a breaking point. While the rate of change in inflation matters to economists, what matters to Americans is overall price levels, which continue to rise.
It may be that Warsh will deliver rate cuts for the White House sooner rather than later, but they may not be the result of a Goldilocks economy marked by strong growth and slow inflation. Rather, they may come because low rates of inflation are really suggesting the consumer is in trouble. Be careful what you wish for.
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