Senate approves President Trump’s nomination of Kevin Warsh to be the next Chairman of the Federal Reserve System
The Senate has confirmed Kevin Warsh, a former Treasury Department official and former Federal Reserve Board member, as the new chairman of the U.S. central bank.
In a reversal, traders now believe the Fed’s next move will be to raise interest rates, even as new Chairman Kevin Warsh and President Donald Trump have signaled support for lower borrowing costs.
The Fed typically lowers interest rates to stimulate the economy and encourage employment, and raises them to control inflation. Forecasters’ current expectations for rate hikes appear to be a response to continued traffic disruption in the Strait of Hormuz, which has pushed up prices for oil, gas and related products, and positive employment growth in March and April.
Although policymakers are somewhat divided on the optimal path for interest rates, there has been no indication yet that a rate hike will occur in the near future. The median forecast for the federal funds rate, a benchmark for national interest rates, announced by the Interest Rate Setting Committee on March 18, suggested that the rate would be cut by a quarter of a percentage point by the end of the year. Three members opposed the April decision because they felt the committee’s accompanying statement was biased toward future interest rate cuts.
“The bar to raise rates is pretty high, not impossible, but pretty high,” said Mike Scordeles, head of U.S. economics at Trust. “We have to see a lot of things break down before it becomes a realistic base case for rate hikes.”
Why are forecasters predicting rate hikes?
Futures markets still largely expect policymakers to keep rates unchanged at their upcoming meetings, but now believe the odds of a rate hike are higher than the odds of a cut, according to CME Group’s FedWatch tool. As of the afternoon of the 18th, the probability of an interest rate hike in December is approximately 49%, and the probability of an interest rate hike in January next year is 58%.
“All of this is a recognition of the reality that formal resolution of the Middle East conflict will take much longer than expected, and the inflationary effects that were expected to be temporary are likely to be far more lasting,” said Jordan Rizzuto, chief investment officer at Gammalord Capital Partners.
Some of this shift in expectations also appears to be driven by the global nature of futures markets, Skorderes said. He said European investors grappling with soaring prices for natural gas and electricity are likely contributing to higher expectations for rate hikes, but added that these price pressures have not been as pronounced in the U.S. as in Europe.
Skorderes said that for rate hikes to be a realistic expectation, Fed policymakers would need to ensure that oil prices remain close to the levels seen after Russia’s invasion of Ukraine in 2022, and that higher oil prices lead to higher prices for more consumer goods. In other words, the Fed is still waiting for more data before taking next action.
Will Mr. Warsh try to lower interest rates?
Mr. Warsh will serve as chairman for the first time at the Federal Open Market Committee’s next meeting in June. As President Trump’s nominee, Warsh suggested he would consider temporary price increases and said he believed productivity gains from AI could act as a drag on inflation.
“Theoretically, that framework leans dovish,” Christian Floro, market strategist at Principal Asset Management, said in a note to USA Today, meaning he could support lower interest rates. “In fact, rising inflation associated with a booming economy may limit his ability to persuade other committee members.”
Even if Mr. Warsh thinks lowering borrowing costs is the right move, he still needs to convince a majority of the FOMC to vote in his favor. The committee consists of 12 voting members. Mr. Warsh has only one vote.
“There’s nothing in economic theory that says now is a good time to cut rates,” said Jacob Robbins, an assistant professor of economics at the University of Illinois. “We need to better understand how AI will impact the economy before calling for interest rate cuts at this point.”
What do changes in interest rates mean for consumers?
In general, when the Fed lowers its benchmark interest rate, it can lead to lower interest rates for consumers on things like credit cards, auto loans, and mortgages. Raising interest rates would be counterproductive, but would benefit savers by increasing returns on high-yield savings accounts and certificates of deposit.
“A common response is, ‘Raising interest rates is a net negative for consumers because it increases borrowing costs.’ What we’ve seen is that over time, raising policy rates can certainly raise borrowing costs, but the effects are rarely immediate,” Rizzuto said.
In theory, higher borrowing costs are designed to curb inflation by making it harder to shop on credit and take out loans, but they don’t automatically make petrol at the pump cheaper.
“Changing interest rates will not necessarily change whether the Strait of Hormuz is open or not,” Skorderes said.
(This article has been updated with new information.)
Contact Rachel Barber rbarber@usatoday.comFollow her on X @rachelbarber_and subscribe to her newsletter Making More of Your Money here.
