Pivotal Week for the Fed

It was a busy week for the Federal Reserve, marked by both committee member developments and a key policy decision. Together, these events offer insight into where U.S. monetary policy may be headed.

On Friday, President Trump said he plans to nominate Kevin Warsh as the next chair of the Federal Reserve. A former Fed governor who served from 2006 to 2011, Warsh has been a frequent critic of the central bank’s handling of monetary policy in recent years, particularly its role in the post-pandemic surge in inflation. If confirmed by the Senate, he would succeed Jerome Powell when Powell’s term expires in May.

Warsh has long been viewed as an inflation hawk, having warned in the past that overly accommodative policy could fuel higher prices. More recently, however, he has argued that the Fed should move more quickly to cut interest rates, reflecting growing concern about economic and labor market momentum. His potential nomination underscores the increasing scrutiny of the Fed’s policy approach as inflation cools but growth risks persist.

Meanwhile, the Federal Reserve voted on Wednesday to hold its benchmark Federal Funds Rate steady at a range of 3.50% to 3.75%. The decision followed three consecutive 25-basis-point rate cuts late last year and was widely anticipated by markets. While the Fed Funds Rate does not directly set mortgage rates, it strongly influences borrowing costs across the broader economy.

Although the pause itself was expected, the decision revealed internal disagreement. Governors Stephen Miran and Christopher Waller dissented, favoring another quarter-point rate cut. Their dissent highlights the Fed’s ongoing challenge: balancing inflation that remains above the 2% target with mounting signs of labor market cooling.

The divide was further reflected in changes to the Fed’s policy statement. Compared with December, the new statement removed language noting that “downside risks to employment rose in recent months.” Waller strongly disagreed in his dissent, arguing that a “substantial deterioration in the labor market is a significant risk,” and he pointed to several warning signs.

While the unemployment rate edged lower in the most recent report, it has trended higher since mid-last year. Job growth has also slowed sharply. Payroll gains in 2025 totaled roughly 600,000 jobs, well below the nearly 2 million annual average of the prior decade. Waller suggested future revisions could “show that there was virtually no growth in payroll employment in 2025.”

Waller also addressed inflation, noting that recent price pressures have been elevated in part due to tariffs. He argued the Fed should largely look through those effects, particularly with underlying inflation close to 2% and still on a path toward the Fed’s long-run goal. Given that backdrop, he said the policy rate remains too restrictive, estimating it sits roughly 50 to 75 basis points above the neutral level, which the median Fed participant places near 3%.

For Waller, cutting rates now would help support the labor market and reduce the risk of a sharper downturn – one that could prove more difficult to counter once underway.

Looking ahead, market expectations suggest the Fed is likely to keep rates on hold at its next two meetings. That outlook, however, remains highly dependent on incoming data, particularly on inflation and employment, which will continue to shape both policy decisions and the broader debate within the central bank.

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By Shelly Williams