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Warsh Wants Lower Rates, but the Economy Is Not Cooperating

Kevin Warsh wants easier policy, but inflation, jobs, and the bond market are pushing back.

May 20, 2026

Kevin Warsh is walking into the Fed with a clear agenda: lower rates and a smaller balance sheet. The problem is the economy is not giving him the setup he wanted.

Inflation has jumped, the labor market has steadied, traders no longer expect rate cuts this year, and the Fed itself is more divided than it has been in years.

That does not mean Warsh has no influence. It means his first job isn’t what he had hoped.

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The Rate-Cut Story Just Got Harder

Warsh may want lower rates, but the market has already moved in the other direction.

At the start of the year, futures traders expected the Fed to cut rates twice in 2026. Now, after the Iran war pushed energy prices higher and inflation reaccelerated, markets are pricing in no rate cuts for the year.

That is a major shift. It means investors are no longer treating easier policy as the base case.

That matters because Warsh does not take over in a vacuum.

He inherits a Fed that already held rates steady in late April, an inflation backdrop that has worsened, and a labor market that no longer looks weak enough to justify immediate easing.

This is the key tension.

Warsh was nominated with a softer-rate message. But the economy he is inheriting is not asking for a softer-rate message. It is asking whether the Fed is willing to stay restrictive even when political pressure rises.

That makes his early credibility extremely important.

If he pushes too hard for cuts while inflation is running hot, markets will read it as political interference.

If he waits too long, he disappoints the administration and rate-sensitive investors. That is not a clean starting point.

The Fed Is More Divided Than The Market Wants

The Fed is not a one-person institution.

Warsh will chair the committee, but he still has to build consensus among the other voting policymakers. That is where this gets tricky. At the most recent meeting, the Fed held rates steady, but four officials dissented.

Three of those dissents came from officials who wanted the Fed to start signaling that rate increases are now as likely as rate cuts.

That is not a committee preparing to line up behind easy money.

For most of Jerome Powell’s tenure, consensus was the norm. Now the committee is visibly split. That matters because divided committees move more slowly.

They require clearer evidence, not typically making aggressive policy turns unless the data forces them.

Right now, the data is not forcing cuts.

Inflation is hotter. Job growth has stabilized. Unemployment is still low. Markets have already adjusted away from an easing path.

So Warsh’s first challenge is political and institutional. He has to lead a Fed where some members are already leaning more hawkish than he is.

If he tries to force a fast pivot, the resistance will be obvious. If he moves carefully, the rate-cut crowd will get frustrated.

Either way, this is not a smooth handoff.

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Inflation Is The Main Obstacle

Inflation is the reason Warsh’s lower-rate agenda is boxed in.

When he won the nomination in January, most Fed officials still expected more cuts. The inflation trend looked manageable enough, and the question was mostly about timing.

That changed after the Iran war began at the end of February and sent energy prices higher. Now inflation has stepped up, and central banks globally are getting more cautious.

That is the part we need to take seriously.

Energy inflation is not just a line item. It affects transportation, food, airfare, consumer sentiment, and inflation expectations.

Once households start feeling higher prices at the pump, the Fed has less room to look relaxed.

Warsh has floated the idea of looking at alternate inflation metrics that show more moderate readings. That sounds appealing if you want cuts. But it is dangerous if headline inflation is what households are living through.

The Fed can talk about core inflation, trimmed means, alternate measures, and productivity. Consumers look at gas prices and grocery bills.

If the Fed sounds too dismissive of that reality, credibility takes a hit.

That is why inflation remains the boss here.

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The Labor Market Removed The Fed’s Excuse

The labor market is not booming, but it has stabilized enough to weaken the case for rate cuts.

A weak February report briefly raised fears that unemployment was about to climb. But March and April looked better, with April job growth at 115,000 and unemployment at 4.3%.

That is not spectacular, but it is good enough to remove the emergency argument.

This is why rate cuts are hard to justify right now.

The Fed usually needs one of two things to ease: inflation moving clearly lower or labor weakness becoming dangerous. Warsh does not have either. Inflation is hotter, and the job market is still functioning.

That creates an awkward backdrop for his AI-productivity argument.

Warsh has argued that AI-driven productivity gains can create room for rate cuts because companies and workers become more efficient, helping keep prices contained.

That is a real long-term possibility. But it is not enough evidence for near-term cuts when inflation is rising today.

Productivity is a promising thesis. Inflation is a current problem.

The Fed has to deal with the current problem first.

The Balance Sheet Goal Is Also Messy

Warsh also wants a smaller Fed balance sheet. That sounds simple until the plumbing gets involved.

The Fed’s assets peaked near $9 trillion in 2022 and now sit around $6.7 trillion. Shrinking that further means reducing liabilities too, including bank reserves. The problem is that reserves are part of the financial system’s operating system.

When reserves fell gradually last fall, anxiety in the bond market became sharp enough that the Fed reversed course and started growing reserves again.

That is the warning.

A smaller balance sheet may be the right long-term goal, but the process is delicate. Move too fast, and funding markets get stressed.

Move too slowly, and critics say the Fed is still too large. Warsh inherits a balance-sheet debate where the easy shrinkage has already happened.

That makes this another area where the market should expect caution, not dramatic action.

The Fed can talk tough about normalization. But if bond-market plumbing starts to wobble, it will protect market functioning first. That is how central banks operate.

What This Means For Investors

The clean investing conclusion is that the market needs to stop pricing Fed relief too casually.

Warsh may eventually be more dovish than Powell. He may shift communication. He may push for a new framework. He may give markets a more rate-friendly tone if inflation cools.

But he cannot cut through the data.

Right now, the winners are companies that do not need lower rates to work. That means exchanges, insurers, cash-flow compounders, and businesses with pricing power.

It also means being careful with long-duration growth, speculative real estate, weak balance sheets, and anything that depends on a quick drop in financing costs.

The Fed chair is changing. The macro math is not.

Actionable Stuff

Do Not Trade Warsh Like An Instant Pivot

A new chair can change tone, but inflation and the committee still control the first move.

Watch The Fed Dissenters

If hawkish dissent grows, the market will start pricing a tougher Fed no matter what Warsh wants.

Favor Businesses That Work Without Cuts

Strong cash flow, pricing power, and low refinancing risk matter more when the easing story fades.

Treat Balance-Sheet Reduction Carefully

A smaller Fed balance sheet sounds bearish for liquidity, but the process will be slow if market plumbing gets stressed.

Keep One Eye On Energy

The Iran war and energy prices are the swing factor. If energy cools, Warsh gets room. If energy stays hot, cuts stay off the table.

Top Picks

CME Group (NASDAQ: CME)

CME is one of the cleanest beneficiaries of a Fed transition that creates more uncertainty, not less.

If traders are constantly repricing the path of rates, inflation, energy shocks, and Fed communication, CME’s interest-rate futures and options franchise becomes more valuable.

This is not a bet that rates rise or fall. It is a bet that the rate path stays noisy.

That is the better trade here. Warsh’s arrival does not simplify the Fed story. It complicates it.

A divided committee, hotter inflation, and changing market expectations all support more hedging demand.

CME gives investors exposure to the market plumbing that benefits when institutions need to manage risk more actively.

What to watch: Interest-rate futures volume, options activity, open interest, and management commentary on volatility across rates products.

Intercontinental Exchange (NYSE: ICE)

ICE fits this setup because it sits across exchanges, clearing, fixed-income data, mortgage technology, and market infrastructure.

A messy Fed transition makes data and risk management more important.

If markets are debating whether Warsh can cut, whether inflation blocks him, and whether balance-sheet reduction affects liquidity, investors need pricing tools, analytics, and trading infrastructure.

ICE also gives some exposure to mortgage technology, but without being a pure housing-volume bet.

That matters because rates staying higher for longer keeps housing under pressure, while the need for market data and infrastructure remains strong.

This is a quality way to own uncertainty without making a fragile directional bet on rate cuts.

What to watch: Fixed-income data revenue, exchange volumes, mortgage technology trends, and demand for analytics tied to rates and credit.

Bank of New York Mellon (NYSE: BK)

BNY Mellon is a solid pick for a world where rates stay firm and markets remain active.

As a custody bank and asset-servicing giant, BK benefits from scale, market activity, and higher short-term rates supporting net interest revenue.

It is not as economically sensitive as a traditional loan-heavy bank, which makes it cleaner in a Fed environment that is still restrictive but not recessionary.

If Warsh cannot deliver quick cuts, firms like BK stay relevant.

The company benefits from institutional asset flows, servicing demand, and a rate environment that remains supportive for interest income.

This is not the flashiest financial. It is the steadier one.

What to watch: Net interest revenue, fee income, assets under custody, deposit trends, and expense discipline.

Chubb (NYSE: CB)

Chubb works because higher-for-longer rates and inflation uncertainty reward disciplined insurers.

The company benefits from investment income when rates stay elevated, while its underwriting quality gives it a stronger foundation than weaker financial names.

In an environment where the Fed cannot rush into cuts and inflation remains a real concern, insurers with pricing discipline deserve attention.

Chubb is also not dependent on a booming consumer or a fast drop in borrowing costs.

It sells necessary coverage, earns income on invested premiums, and has the balance-sheet strength investors tend to value when macro visibility gets worse.

This is a clean quality-financial pick for a Fed transition that looks more complicated than bullish.

What to watch: Combined ratio, premium growth, investment income, catastrophe losses, and commercial insurance pricing.

Bottom Line

The Big Takeaway

Warsh wants lower rates, but he is inheriting an economy that makes cuts hard to justify.

What It Means

Inflation has reaccelerated, the labor market has stabilized, markets no longer expect 2026 cuts, and the Fed committee is divided. A new chair changes the tone, not the facts.

How To Play It

Own businesses that benefit from volatility, market infrastructure, strong cash flow, and higher-for-longer rates.

Avoid stocks that need immediate Fed relief. Warsh may eventually shift the policy path, but the first message from the data is simple: not yet.

That’s it for today’s edition—thanks for reading! Reply to this email with any feedback or let me know which macro trends or markets you’d like me to cover next.

Best Regards,
—Noah Zelvis
Macro Notes