US Stock Market | Warsh's path to rate cuts getting tougher even before his Fed entry

Kevin Warsh is still months away from taking the helm at the Federal Reserve, but his ability to deliver the interest-rate cuts President Donald Trump expects is facing hurdles as the US economy, and his future colleagues, tilt in the opposite direction.

Most Fed officials see no compelling reason to rush additional rate cuts, given inflation is still elevated and the labor market seems to be stabilising. The biggest surge in oil prices in four years, stemming from renewed conflict in the Middle East, might only add to their reluctance.

Several policymakers have also voiced skepticism over the ideas underpinning Warsh's vision for lower rates, which centers on the promise that a technology revolution is about to deliver a low-inflation economic boom, and on his pledge to downsize the Fed's balance sheet.

This is all happening even before Warsh has been formally nominated, and while his confirmation in the Senate faces opposition from Republicans angered by a Department of Justice investigation into the Fed's current leader, Jerome Powell, whose term as chair ends in May.

Even if that's resolved, the dynamic suggests Warsh could face heavy resistance should he push for steep, immediate cuts, setting up a potential flash point with the White House. It may also mean Warsh will struggle to fulfill a key part of the Fed chair's job: advancing an economic argument that persuades colleagues and drives consensus among them.

"If Chair Warsh wanted to have a sequence of cuts - four rate cuts over the second half of the year or something like that - unless we're surprised by the data, I just don't think he'll have the votes for that," said William English, a professor at the Yale School of Management and a former Fed division director. "The outlook is one where that would not be appropriate policy."

Warsh, contacted through the Hoover Institution where he is a visiting fellow, didn't respond to a request for comment.

'Show-Me Stage'
After lowering rates at three consecutive meetings to close out 2025, Fed policymakers held steady in January, citing improvements in the labor market and worries about sticky inflation that ended last year almost a percentage point above their 2% target.

Bolstered by a subsequent January jobs report that was better than expected, most policymakers have endorsed the idea that the labor market is stabilising. A few, like Cleveland Fed President Beth Hammack - a voter on rate decisions this year - said they expect rates to remain on hold for "some time." Even Governor Christopher Waller, who called for a quarter-point cut in January, has acknowledged the possibility that an improving labor market might warrant another hold when officials meet March 17-18.

Several officials have also considered the possibility that the Fed may need to hike rates should inflation stay above target, according to the minutes of the January meeting. The Fed may yet find itself in a position later this year where inflation eases and the labor market holds up, paving the way for "good news" cuts on Warsh's watch, said Claudia Sahm, chief economist at New Century Advisors and a former Fed economist. But for now, she added, officials are in a "show-me stage," waiting for inflation progress.

AI Skepticism
While most of the data doesn't point to a cut, Warsh has signaled that larger, structural shifts in the US economy could justify lowering rates. Pointing to the surge in artificial intelligence, Warsh has drawn parallels to the 1990s internet boom, a period that saw soaring productivity that for a time helped hold down inflation and rates. Productivity gains are crucial because labour costs are the biggest expense for many businesses. So when firms can use technology and equipment to increase output, that drives economic growth without generating wage-driven inflation.

"AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness," Warsh wrote in a Wall Street Journal opinion piece in November. And recently, labor productivity has indeed soared. Over 50 years, the annualised rate of growth for nonfarm employee output per hour in any given quarter has averaged 1.9%. Over the last 10 quarters, it's averaged 2.7% and in the third quarter of 2025 it hit 4.9%, according to the Bureau of Labor Statistics.

But in the weeks since Trump announced Warsh as his Fed pick, multiple Fed officials have made clear they remain unconvinced that the economy is experiencing the same kind of conditions that allowed then-Fed Chair Alan Greenspan to run the economy hot in the 1990s.

The skepticism goes like this: It's too early to know that AI is driving the current pickup in productivity, and even if it is, the sheer scale of AI investment may mean interest rates need to be higher, at least in the near term. Alternative theories behind the productivity jump include investments in other labor-saving technology and a burst in new-business formation.

"I don't think I'm alone in this, but the growth and productivity we've seen over the last year or two isn't from AI," Waller, who until Warsh's selection had been in contention for the Fed's top job, said in a panel discussion on Feb. 23. "I don't think any of us believe that that's the big driver."

Balance Sheet Pushback
The other pillar of Warsh's outlook, which shrinking the Fed's $6.6 trillion balance sheet can create room for cuts, also hasn't gained traction among policymakers or on Wall Street. The Fed's securities holdings ballooned in part because officials judged more stimulus was needed when the central bank's benchmark rate hit zero during the Global Financial Crisis and during the pandemic.