The first policy meeting will be a litmus test; will Trump's demands for rate cuts be met?
2026-06-15 20:52:38
On the day Kevin Warsh was sworn in as Chairman of the Federal Reserve, President Trump's words still resonated: "Do not let me or anyone else interfere. Set monetary policy independently and deliver outstanding results."
Now, this expectation of "independence" will face a real test during the two-day policy meeting starting on June 16. Market consensus is clear—the Federal Reserve will maintain the federal funds rate range at 3.5%-3.75%, meaning Warsh will have to convey a tighter policy signal to Trump, who continues to pressure for rate cuts, a signal he is unwilling to accept.
The Fed's policy logic is clear: cut interest rates to support the economy when the job market is under pressure, and raise interest rates to curb overheating when inflation is high. The current adherence to interest rate levels stems from the clear answer given by economic data.
Although there have been many positive developments in the US-Iran conflict recently, with continuous positive news about US-Iran negotiations, the strong resilience of US employment data over the past three months has rendered interest rate cuts unsupported by reality. It is impossible to reinterpret the strong employment data that Trump has repeatedly praised.
Bill Adams, chief U.S. macroeconomist at Comina Bank, stated bluntly that the Federal Reserve will only have a reasonable basis for cutting interest rates if the Middle East conflict is fully resolved or the downside risks to employment caused by AI materialize. Otherwise, in the current environment, a decision to cut interest rates would be difficult to convince the public.
It is worth noting that the U.S. economy does indeed exhibit a K-shaped pattern, and the potential for a deteriorating employment structure remains a concern.
A well-known domestic securities firm believes that this meeting will not only maintain interest rates unchanged, but may also remove the dovish bias in the statement, and the dot plot guidance will also change from "interest rate cut" to "maintain unchanged".
Warsh's policy stance has always been shrouded in mystery. During his tenure as a Federal Reserve governor from 2006 to 2011, he was known for his hawkish image and advocated for curbing inflation by raising interest rates.
However, during the chairman nomination hearing, he released a dovish signal, proposing that the two major variables of AI-driven productivity improvement and the Fed's balance sheet reduction could effectively suppress inflation in the long term and create room for interest rate cuts.
This seemingly contradictory statement led Darius Dale, founder of the macro research firm 42 Macro, to bluntly state: "At this stage, no one in the entire market can fully grasp Kevin Walsh's complete policy response function."
Warsh's years of public criticism of the Federal Reserve system, including his outspoken assertion at Senate hearings that it "has failed to fulfill its policy mission," has created significant obstacles for his internal coordination efforts.
The FOMC members are all senior professionals. Although they share the same goal, it remains to be seen whether they will agree with the reform path of this "new boss who has been publicly criticizing them for years".
More importantly, Warsh's economic ideas were deeply influenced by two legendary figures—legendary investor Stanley Druckenmiller and the late economist Milton Friedman. His fundamental judgments on economic operation are vastly different from the mainstream views of current FOMC members, and he may bring forth policy ideas that the US central bank has not seen in decades.
The implementation of reform proposals also faces challenges. Warsh advocates for a significant reduction in the disclosure of the Federal Reserve's forward guidance, and the market generally expects his external communications to be even more "reserved" than Powell's and the previous three chairmen.
David Royal, chief financial investment officer at Schrent Asset Management, is concerned that if Walsh continues to evade key market issues, it could exacerbate financial market volatility in the medium to long term.
Furthermore, his proposed "balance sheet reduction + interest rate cut" policy, while supported by a minority such as Treasury Secretary Bessant, has been met with caution from most members of the Federal Reserve, especially given the current high inflation. Balancing the pace of balance sheet reduction with the timing of interest rate cuts has become a difficult problem that he must solve.
Inflation is undoubtedly the first major obstacle for Warsh after taking office. Since the spring of 2021, US inflation readings have consistently exceeded the Federal Reserve's long-term target of 2%, and the latest data further highlights its complexity: in April, the overall PCE rose 3.8% year-on-year, while the core PCE rose 3.3% year-on-year.
May's CPI rose 4.2% year-on-year, driven by gasoline prices, marking the largest increase in three years. Although the core CPI rose 0.2% month-on-month, indicating that energy price increases have not been fully transmitted, the stickiness of inflation should not be ignored.
Warsh prefers to use the cut-off mean PCE inflation indicator, which, after removing extreme data, rose 2.3% year-on-year in April, seemingly closer to the policy target. However, Brian Bethune, professor of economics at Boston College, points out that current inflation is mainly driven by one-off upward shocks such as supply bottlenecks and soaring oil prices. The cut-off mean PCE will significantly underestimate the real inflation level, and its reference value is limited in the context of the qualitative change in the inflation structure after the pandemic.
Analysis shows that the Fed's two core indicators are currently distorted in two directions: the core PCE overestimates inflationary pressures due to statistical loopholes, while the cut-off mean PCE underestimates stickiness. This puts policy decisions in a dilemma: "following the overestimated indicator could lead to excessive tightening, while following the underestimated indicator could trigger a second wave of inflation."
Warsh took over the Federal Reserve at a time when the central bank's independence was being heavily questioned.
Upholding the Federal Reserve's global credibility has become a core responsibility of its mandate. Research shows that compromised independence leads to higher yields on corresponding bonds, meaning higher interest rates are needed to guarantee the issuance of government bonds.
Looking back, the conflict between Trump and the Federal Reserve has a long history: after nominating Powell as chairman in 2017, he has continuously and publicly criticized his policies.
After returning to power, criticism escalated to budget disagreements over the renovation project of the Federal Reserve headquarters, which even triggered a special investigation by the Department of Justice into Powell. Several former Federal Reserve chairmen condemned it as an "unprecedented move to undermine the central bank's independence." Although the investigation was eventually dropped, Powell remained a governor, creating a potential check and balance for internal decision-making.
Last year, Trump's attempt to remove Federal Reserve Governor Lisa Cook from office further exacerbated market concerns about political interference in central banks.
With the June interest rate meeting approaching, the entire market was closely watching Warsh's first appearance early Thursday morning.
Early this morning, Trump announced the completion of the US-Iran memorandum of understanding, and Pakistan simultaneously claimed that the peace agreement had been implemented. Inflation expectations should have fallen sharply due to the positive impact of this news. However, judging from the trading of interest rate futures on the CME Group, the market has not lowered its expectations for at least one interest rate hike by the end of 2026.
The main reason is the unpredictable nature of the US-Iran conflict, and the fact that the high capital expenditure of the AI industry makes the market more willing to accept higher interest rates.
Now, this expectation of "independence" will face a real test during the two-day policy meeting starting on June 16. Market consensus is clear—the Federal Reserve will maintain the federal funds rate range at 3.5%-3.75%, meaning Warsh will have to convey a tighter policy signal to Trump, who continues to pressure for rate cuts, a signal he is unwilling to accept.
Economic data has locked up the room for interest rate cuts, and market expectations have shifted to interest rate hikes.
The Fed's policy logic is clear: cut interest rates to support the economy when the job market is under pressure, and raise interest rates to curb overheating when inflation is high. The current adherence to interest rate levels stems from the clear answer given by economic data.
Although there have been many positive developments in the US-Iran conflict recently, with continuous positive news about US-Iran negotiations, the strong resilience of US employment data over the past three months has rendered interest rate cuts unsupported by reality. It is impossible to reinterpret the strong employment data that Trump has repeatedly praised.
Bill Adams, chief U.S. macroeconomist at Comina Bank, stated bluntly that the Federal Reserve will only have a reasonable basis for cutting interest rates if the Middle East conflict is fully resolved or the downside risks to employment caused by AI materialize. Otherwise, in the current environment, a decision to cut interest rates would be difficult to convince the public.
It is worth noting that the U.S. economy does indeed exhibit a K-shaped pattern, and the potential for a deteriorating employment structure remains a concern.
A well-known domestic securities firm believes that this meeting will not only maintain interest rates unchanged, but may also remove the dovish bias in the statement, and the dot plot guidance will also change from "interest rate cut" to "maintain unchanged".
His fluctuating stance has sparked controversy: from a hawkish board member to a lenient advocate.
Warsh's policy stance has always been shrouded in mystery. During his tenure as a Federal Reserve governor from 2006 to 2011, he was known for his hawkish image and advocated for curbing inflation by raising interest rates.
However, during the chairman nomination hearing, he released a dovish signal, proposing that the two major variables of AI-driven productivity improvement and the Fed's balance sheet reduction could effectively suppress inflation in the long term and create room for interest rate cuts.
This seemingly contradictory statement led Darius Dale, founder of the macro research firm 42 Macro, to bluntly state: "At this stage, no one in the entire market can fully grasp Kevin Walsh's complete policy response function."
Internal resistance becomes apparent: Criticism of the past triggers a crisis of trust among committee members.
Warsh's years of public criticism of the Federal Reserve system, including his outspoken assertion at Senate hearings that it "has failed to fulfill its policy mission," has created significant obstacles for his internal coordination efforts.
The FOMC members are all senior professionals. Although they share the same goal, it remains to be seen whether they will agree with the reform path of this "new boss who has been publicly criticizing them for years".
More importantly, Warsh's economic ideas were deeply influenced by two legendary figures—legendary investor Stanley Druckenmiller and the late economist Milton Friedman. His fundamental judgments on economic operation are vastly different from the mainstream views of current FOMC members, and he may bring forth policy ideas that the US central bank has not seen in decades.
Reform proposals are difficult to implement: reduced forward guidance + controversy over policy mix.
The implementation of reform proposals also faces challenges. Warsh advocates for a significant reduction in the disclosure of the Federal Reserve's forward guidance, and the market generally expects his external communications to be even more "reserved" than Powell's and the previous three chairmen.
David Royal, chief financial investment officer at Schrent Asset Management, is concerned that if Walsh continues to evade key market issues, it could exacerbate financial market volatility in the medium to long term.
Furthermore, his proposed "balance sheet reduction + interest rate cut" policy, while supported by a minority such as Treasury Secretary Bessant, has been met with caution from most members of the Federal Reserve, especially given the current high inflation. Balancing the pace of balance sheet reduction with the timing of interest rate cuts has become a difficult problem that he must solve.
The debate over inflation indicators highlights the predicament, with the 2% target remaining under pressure.
Inflation is undoubtedly the first major obstacle for Warsh after taking office. Since the spring of 2021, US inflation readings have consistently exceeded the Federal Reserve's long-term target of 2%, and the latest data further highlights its complexity: in April, the overall PCE rose 3.8% year-on-year, while the core PCE rose 3.3% year-on-year.
May's CPI rose 4.2% year-on-year, driven by gasoline prices, marking the largest increase in three years. Although the core CPI rose 0.2% month-on-month, indicating that energy price increases have not been fully transmitted, the stickiness of inflation should not be ignored.
Indicator selection faces a dilemma: the trimmed mean PCE is questioned.
Warsh prefers to use the cut-off mean PCE inflation indicator, which, after removing extreme data, rose 2.3% year-on-year in April, seemingly closer to the policy target. However, Brian Bethune, professor of economics at Boston College, points out that current inflation is mainly driven by one-off upward shocks such as supply bottlenecks and soaring oil prices. The cut-off mean PCE will significantly underestimate the real inflation level, and its reference value is limited in the context of the qualitative change in the inflation structure after the pandemic.
Analysis shows that the Fed's two core indicators are currently distorted in two directions: the core PCE overestimates inflationary pressures due to statistical loopholes, while the cut-off mean PCE underestimates stickiness. This puts policy decisions in a dilemma: "following the overestimated indicator could lead to excessive tightening, while following the underestimated indicator could trigger a second wave of inflation."
The debate over independence continues, and the Federal Reserve's credibility faces a major test.
Warsh took over the Federal Reserve at a time when the central bank's independence was being heavily questioned.
Upholding the Federal Reserve's global credibility has become a core responsibility of its mandate. Research shows that compromised independence leads to higher yields on corresponding bonds, meaning higher interest rates are needed to guarantee the issuance of government bonds.
Looking back, the conflict between Trump and the Federal Reserve has a long history: after nominating Powell as chairman in 2017, he has continuously and publicly criticized his policies.
After returning to power, criticism escalated to budget disagreements over the renovation project of the Federal Reserve headquarters, which even triggered a special investigation by the Department of Justice into Powell. Several former Federal Reserve chairmen condemned it as an "unprecedented move to undermine the central bank's independence." Although the investigation was eventually dropped, Powell remained a governor, creating a potential check and balance for internal decision-making.
Last year, Trump's attempt to remove Federal Reserve Governor Lisa Cook from office further exacerbated market concerns about political interference in central banks.
The market is closely watching the debut: three core issues remain to be resolved.
With the June interest rate meeting approaching, the entire market was closely watching Warsh's first appearance early Thursday morning.
Early this morning, Trump announced the completion of the US-Iran memorandum of understanding, and Pakistan simultaneously claimed that the peace agreement had been implemented. Inflation expectations should have fallen sharply due to the positive impact of this news. However, judging from the trading of interest rate futures on the CME Group, the market has not lowered its expectations for at least one interest rate hike by the end of 2026.
The main reason is the unpredictable nature of the US-Iran conflict, and the fact that the high capital expenditure of the AI industry makes the market more willing to accept higher interest rates.
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