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Hot inflation report throws cold water on Kevin Warsh's plans to jumpstart Fed rate cuts

By Mary Helen Gillespie TheStreet

Updated May 13, 2026 2:26 AM

April's hot inflation reading isn't going to change the Federal Reserve's dire outlook for interest-rate cuts in 2026 but it will make incoming Fed Chair Kevin Warsh's job tougher during his first year leading the world's most powerful central bank.

The Senate is expected to confirm President Donald Trump's nominee to replace Jerome Powell by the end of the week. Both Trump and Warsh have said the central bank must focus on lowering the cost of short-term borrowing by cutting interest rates to 1% or below.

But since Warsh's nomination was announced in January, much of the nation's economic and financial landscape has upended the expectations -- especially from the White House -- that those rate cuts could begin as soon as the June Federal Open Market Committee.

In fact, most economists, traders and Fed watchers are forecasting that the earliest American consumers, investors and businesses will see lower interest rates will be in July, or perhaps September, of 2027.

With inflation levels spiking due to energy costs fueled by the Iran War and the stabilization of the "low-hire, low-fire" labor market, experts expect Warsh will be constrained by price pressures that also reflect lingering effects of Trump's tariffs plus a growing divide among his policymaking colleagues at the Fed who appear to be firmly settling into dovish or hawkish camps.

Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, told CNN the latest inflation numbers put Warsh and other Fed officials in a difficult position.

"Even if they want to support the labor market and support growth, it's hard to justify (a rate cut) when core inflation is pushing up on 3% and threatening to climb above it," Allen said.

Fed watchers say Warsh, mocked by Democratic leaders as Trump's "sock puppet,'' will find his new job at the mercy of the economy's meanderings much like Powell has.

"The thing that will dictate his actions are events, rather than ideology," Adam Marden, co-portfolio manager of the Dynamic Global Bond Strategy at T. Rowe Price,'' told Bloomberg.

That sentiment has many experts wondering how long it will take Trump to blast Warsh publicly and professionally as the president has done during both his terms to Powell.

Fed's dual 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.

When traders price the next Fed rate cut

Traders are currently pricing in the next interest-rate cut for mid-to-late 2027, according to the CME FedWatch Tool.

So are many major brokerages, the most recent being Bank of America.

And as I reported, bond traders are rapidly reshaping their outlook on U.S. monetary policy, increasing bets that the Fed could raise interest rates before cutting them as persistent inflation risks and geopolitical tensions upend dovish expectations.

The Kalshi prediction market estimates a 42% chance of a Fed rate hike before July 2027.

April inflation show energy-price hike

The April Consumer Price Index report released May 12 by the Bureau of Labor Statistics was higher than estimates, showing:

The headline CPIclimbed 0.6% from March while the core gauge excluding food and energy costs rose 0.4%.
The CPI jumped 3.8% on a year-on-year basis, outstripping workers' earnings for the first time in three years and marking the highest inflation print since the post-pandemic recovery in May 2023. This is well above the Fed's 2% target.
Core inflation was affected by a statistical quirk from the government's fall shutdown and showed housing costs have climbed the most since 2024.
Energy prices soared 17.9% year-over-year with gas prices up 28.4% and fuel oil prices up a whopping 54.3%.

Iran War heightens inflation, rate-cut risk

Since the Iran War began at the end of February, American consumers, especially those with lower or fixed incomes, are finding that high gasoline and utility prices are hurting their household budgets while businesses juggle the energy shocks by passing some of those costs of goods and services onto their customers.

The March CPI read pointed to an inflation rate of 3.3%.

The Bureau of Economic Analysis released the March 2026 Personal Consumption Expenditures -- the Fed's preferred inflation gauge -- on April 30 showing an acceleration in headline inflation largely driven by energy costs.

Headline PCE (Year-over-Year): 3.5% up from 2.8% in February.
Core PCE (Year-over-Year): 3.2% (excluding food and energy) up from 2.9% in February.

Strong April jobs report turns rate-cut outlook to inflation risk

Despite the rising energy costs fueled by the Iran War, U.S. employers added more jobs than expected for a second month and the unemployment rate held steady in April, the Bureau of Labor Statistics reported May 8.

Nonfarm payrolls rose 115,000 last month after an even bigger surge in March, marking the strongest two-month increase since 2024.
The unemployment rate was unchanged at 4.3%.

Fed official issues stern warning on rate cuts

Economists at RSM, a consulting firm that specializes in forecasting, told The New York Times that inflation will peak "at or above" 4.5% on an annual basis this summer as the supply shock from the Iran War works its way through the U.S. economy.

"The war has come home, and Americans can feel it and see it in their grocery basket," Joe Brusuelas, RSM U.S. chief economist, told CNN.

Federal Reserve Bank of Chicago President Austan Goolsbee told NPR after the April CPI release that inflation readings show the pervasive price pressures in the U.S. economy may even indicate an overheating.

"If you look at the components that are not energy, like services, if that is an indication that the underlying economy is overheating then the Fed has got to be thinking about how do we break the chain of escalating inflation," Goolsbee said.

Goolsbee's comments add to the ongoing shift among Fed policymakers away from any consideration of a rate reduction in the near future -- and with some, including Goolsbee -- concerned that a rate hike might be on the table as well.

"We've got an inflation problem in this country and we've got to get it back down," Goolsbee said.

White House defends Middle East strategy

In a televised press gaggle before departing for China May 12, Trump repeatedly told reporters that his fiscal and geopolitical strategies were succeeding and defended his administration.

"My policies are working incredibly,"Trump shouted. "If you go back to just before the war, for the last three months inflation was at 1.7%.''

He added that gas prices would come down quickly once the war is officially over.

National Economic Council Director Kevin Hassett downplayed the hot April CPI read in an interview with CNN, saying prices for household essentials like eggs (down 44% over last year), beef, dairy and prescription drugs remain stable or are falling.

After the April jobs report, Hassett said there was no need for the Fed to be considering rate hikes as some Fed officials have been hinting.

Warsh's top challenge to cutting rates

Warsh, a former Fed governor, has been extremely critical of the central bank in the 15 years since he resigned that post.

During his Senate confirmation hearings he focused on creating "regime change" that, in addition to lower interest rates, would shrink the size of the Fed's $6.7 trillion balance sheet.

Yet even if the war ends next week, his greatest challenge will be to persuade the other 11 voting members of the FOMC to follow his lead and accept that short-term shocks like oil prices don't traditionally have a long-term inflationary impact.

That's certainly what Trump expects.

The Fed held the benchmark Federal Funds Rate steady at 3.50% to 3.75% at its April 29 meeting in ⁠an unusually divisive 8–4 vote, the closest since 1992.

"It has been such a difficult market to trade or even analyze," Priya Misra, portfolio manager at JPMorgan Asset Management, told Bloomberg.

AI is "creating capex, bond supply and optimism about the longer-term growth prospects of the U.S. And meanwhile we are amid the largest shock to energy,'' Misra said.

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This story was originally published May 13, 2026 at 2:03 AM.