If the Federal Reserve still has any reasons to cut interest rates in the near future, they’re getting harder and harder to find.
Friday’s jobs report for April provided the latest evidence that the central bank’s larger concern isn’t a flagging labor market but rather a cost of living that is getting increasingly harder for ordinary Americans to bear.
The nonfarm payrolls increase of 115,000 last month is hardly gangbusters, but is another sign that the jobs picture has stabilized at least enough to reduce the pressure for rate cuts.
By comparison, there is scant evidence to say the same for inflation, likely pushing the rate-setting Federal Open Market Committee into a more hawkish posture where officials are comfortable staying where they are for a prolonged period.
“The Fed will shift its focus to containing upside inflation risks now that the labor market appears back on track,” said Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management. “The FOMC could well feel compelled to remove the easing bias from its next post-meeting statement in June, which would suggest the hawks are gaining the upper hand on the committee for the time being.”
In Fed terms, that means that a swell of cautious sentiment from multiple regional presidents could take further hold.
At last week’s FOMC meeting, three of those presidents voted against the post-meeting statement. The group did not object to the committee’s decision to hold rates steady but rather to “forward guidance” language widely interpreted as signaling the next move would more likely be a cut.
Facing inflation
“I have never been that big of a fan of trying to use words to jawbone policy decisions,” Austan Goolsbee, president of the Chicago Fed, said Friday in a CNBC interview. Moreover, he said he also is concerned about current inflation trends.
“We’ve been above the 2% fed target for five years now. We stopped making progress last year, and now the last three months, it’s going up instead of down,” added Goolsbee, who does not get a vote this year on the committee but will in 2027. “We’ve got to just keep an eye on this, because if everybody starts presuming that inflation rates are going back to something like what they were a few years ago, we would be in a in a bit of a pickle as a central bank.”
Goolsbee further argued that inflation pressure is coming from more than just gasoline and tariffs, and is increasingly showing up in services costs. The consumer price index for March pointed to an inflation rate of 3.3%, well above the Fed’s 2% goal.
The traditional approach to higher inflation and a steady labor market normally would argue against cuts.
Recent data trends could lend credence to the argument that the Fed can continue holding rates where they are while also keeping its options open, including raising rates.
“This makes it more and more clear that the Fed [can have] all the patience in the world,” said Scott Clemons, chief investment strategist at Brown Brothers Harriman. “There’s nothing on the economic front that’s requiring them to lower interest rates any further.”
Trouble for Warsh
While market sentiment can shift rapidly, traders have removed any probability of a rate cut essentially through April 2031, according to fed funds futures pricing. In fact, the rate curve implies a much stronger chance of hikes in coming years.
“Obviously it makes the Fed’s decision easier,” Dan North, senior economist for North America at Allianz, said of the recent data. “This just makes the decision that much easier to hold, and maybe in the next year, start leaning the bias the other way.”
If that’s the case, though, it makes things problematic for incoming Chair Kevin Warsh, who President Donald Trump sent to the Fed with expectations for lower rates.
The former Fed governor has been open about his preference for a lower funds rate, arguing that the Fed still can control inflation while easing policy. Warsh has advocated for an approach that focuses more on the central bank’s $6.7 trillion balance sheet rather than the overnight funds rate currently used as the main policy tool.
However, selling a rate cut with inflation north of 3% will be a difficult job, particularly considering the leanings of the current committee structure.
“He has really got his hands full on this. Certainly he was chosen by Trump because he is probably leaning towards lower interest rates,” North at Allianz said. “Warsh comes in, saying, ‘Gosh, I think it’d be great if we had a family fight once in a while.’ Well, I don’t think this was the fight he was expecting.”
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