The Federal Reserve is running out of reasons to cut interest rates, and Walsh faces a tough situation as he takes over.

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Amidst the dual fundamentals of stable employment and rising inflation, the Fed's window for rate cuts is closing rapidly.

In April, nonfarm payrolls increased by 115,000. While the job market is not robust, it is sufficiently stable, further reducing the urgency of expectations for a rate cut. In contrast, inflationary pressures have yet to ease—March's Consumer Price Index (CPI) rose 3.3% year-on-year, far exceeding the Fed's 2% policy target, and data from the past three months shows inflation is not falling but rising.

Nick Timiraos, a Wall Street Journal reporter known as the "New Fed Whisperer," tracks market expectations that show more and more institutions are postponing or even canceling rate cut forecasts for this year. Chicago Fed President Austan Goolsbee said on Friday that inflation has exceeded its target for five consecutive years and is increasingly reflected in service sector costs, which is concerning.

Federal funds futures market pricing is more extreme—traders have basically ruled out the possibility of a rate cut before April 2031, and the yield curve even implies a probability of rate hikes in the coming years. Kevin Warsh, who is about to assume the Fed chairmanship, will find it difficult to advance a rate cut agenda within a policy committee that is trending hawkish.

Stable Employment Data, Less Pressure to Cut Rates

April's nonfarm payroll increase of 115,000, while below robust growth levels, is enough to show that the labor market is stabilizing after previous fluctuations, reducing the necessity for the Fed to boost employment through rate cuts.

Scott Clemons, chief investment strategist at Brown Brothers Harriman, said: "This is increasingly clear evidence that the Fed has ample patience. There is nothing on the economic side that compels them to cut rates further."

Dan North, senior economist at Allianz North America, shared the same view, believing recent data makes the Fed's decision to keep rates unchanged all the more reasonable, and noting that policy orientation may gradually tilt in the other direction in the coming year.

Inflation Remains High; Hawkish Voices Gain Strength

Inflation is becoming the core focus in the Fed's internal discussions. In an interview with CNBC on Friday, Goolsbee bluntly expressed concern about current inflation trends: "We've exceeded the 2% target for five years in a row. Last year, progress stopped, and in the past three months, inflation has not fallen but risen." He warned that if the market widely expects inflation to return to levels from a few years ago, the Fed will face a "dilemma."

Goolsbee also emphasized that inflationary pressure is no longer limited to single factors such as gasoline and tariffs but is increasingly spreading into service sector costs.

At last week's Federal Open Market Committee (FOMC) meeting, three regional Fed presidents voted against the post-meeting statement. They did not object to the decision to leave rates unchanged itself, but opposed the forward guidance in the statement, which markets widely interpreted as hinting at a rate cut as the next move.

Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management, said: "Now that the labor market seems back on track, the Fed will shift its focus toward curbing upside inflation risks. In the June post-meeting statement, the FOMC may remove its dovish phrasing, which means hawks may temporarily hold the upper hand on the committee."

The "New Fed Whisperer": Half of Institutions No Longer Expect a Rate Cut This Year

Nick Timiraos pointed out on social media that after the release of April's nonfarm data, an increasing number of sell-side institutions and Fed watchers are postponing or canceling their rate cut forecasts. He stated that currently half of all institutions do not predict a rate cut this year, and given the inertia of such forecasts, this proportion could further increase.

Goldman Sachs has explicitly revised its forecasts, postponing the last two expected rate cuts by a quarter each, now to December 2026 and March 2027. Federal funds futures market pricing is even more pessimistic—according to futures pricing, traders have virtually eliminated any probability of a rate cut before April 2031, and the yield curve even suggests a chance of rate hikes in the coming years.

This shift in market expectations reflects a fundamental reassessment of the Fed's policy path by outsiders: the question of rate cuts has changed from "when they will come" to "whether they will come at all."

Warsh's Succession Imminent; Lower Rates Agenda May Struggle

Warsh, who is about to take over as Fed chair, is facing a tough situation. Part of the reason for his nomination by Trump was the expectation that he would promote rate cuts. Warsh himself has publicly expressed a preference for a lower federal funds rate, and advocates that the Fed should focus more on reducing its $6.7 trillion balance sheet rather than relying on the overnight rate as the main policy tool.

However, with inflation above 3%, advocating for a rate cut will be a daunting task, especially considering the FOMC committee currently trends overall toward being hawkish.

Dan North said bluntly: "He faces a very tough challenge. He was clearly chosen by Trump because he favors low rates. But when Warsh arrives, he'll find that this internal battle is far more difficult than he expected."

Warsh has previously said that he believes occasional policy disagreements within the Fed are healthy. But the current policy environment suggests that what he faces may be far more than an ordinary "family argument."

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