The Warsh Fed — Why the "Most Boring" Scenario of No Rate Cuts Might Actually Be Good

Kevin Warsh takes over as Fed Chair in 60 days. The Trump administration wants rate cuts. The market says there's no justification. The CME FedWatch tool shows zero change being priced in.

That's the reality surrounding the Federal Reserve right now.

Is There Any Data That Justifies Rate Cuts?

No. Not right now.

Start with employment. The latest numbers significantly beat expectations. There were downward revisions for the prior month, but signals of a collapsing labor market are hard to find. The unemployment rate remains low. Weekly jobless claims were slightly soft, but the overall picture says "economic growth is still solid."

Inflation is a bigger problem. PCE came in at 3%, with the next print expected at 3.4%. The 2-year Treasury yield has surged sharply.

Cut rates in this environment? You can't build a rational case for it.

The Dilemma Warsh Will Face

There's concern that Warsh will simply be a "Trump loyalist" — that he'll cut rates under political pressure immediately upon taking office.

But structural constraints exist.

The Fed Chair doesn't set rates unilaterally. A majority vote on the FOMC is required. With current economic data providing no support for cuts, the likelihood of committee members going along is low. The committee would push back, and more importantly, the bond vigilantes would push back harder.

What happens when the Fed loses credibility? Even if they cut rates, long-term Treasury yields rise instead. If the market concludes "the Fed has no will to control inflation," the effect of rate cuts reverses entirely. Mortgage rates don't fall — they paradoxically climb higher.

Warsh effectively has one viable option: make data-driven decisions. Yielding to political pressure damages Fed independence, and the entire market pays the price.

Trump Is Already Playing "First Line of Defense"

Here's something interesting. Every time the market plunged, some form of response came from the Trump administration.

Truth Social posts, policy hints, ceasefire announcements — Trump has essentially put himself on the economic calendar. Market participants already view Trump as the market's "first line of defense."

This actually reduces the need for the Fed to play an outsized role. If fiscal policy and geopolitical management are backstopping the market, the case for the Fed to rush rate cuts weakens further.

But this structure carries its own risks.

Plans to increase military spending by 50% in fiscal year 2027 have surfaced. That's $2.5 trillion. Federal debt stands at $42–45 trillion. If the approach keeps returning to "stimulus equals sending checks to households," that's inherently inflationary.

With rates, oil prices, and inflation all sticky, the only rational move for the Fed is to do nothing.

What the Market Has Priced In

The CME FedWatch tool shows something straightforward. Traders aren't pricing in any rate changes in the near future.

Every time a Fed meeting comes around, the headline will read "What will the Fed do today?" But realistically, the answer is likely "nothing."

Oil is sticky. Inflation is sticky. Rates are sticky. For mortgage rates to drop below 6%? That would require unconventional tools — special programs, subsidies. And those tools become another source of inflationary pressure.

Warsh's era might usher in the most boring Fed meetings in recent memory. Month after month of "hold again" as the outcome. But from an investor's perspective, this isn't necessarily a bad scenario. A predictable Fed is the easiest Fed for markets to digest.

If rates don't come down, asset prices must be justified by corporate earnings and economic growth alone. That might actually be the condition for a healthier market.