--- title: "Soaring inflation shatters dreams of interest rate cuts, how will the next Federal Reserve chair report to Trump?" type: "News" locale: "en" url: "https://longbridge.com/en/news/282500666.md" description: "Federal Reserve Chairman Jerome Powell is facing strong criticism from Trump, especially after the market turmoil caused by the Iran war. Powell's hopes for interest rate cuts have been dashed by soaring oil prices, with the inflation rate rising to 3.3% in March. Newly nominated Kevin Warsh may face even greater pressure, as the market no longer generally expects interest rate cuts this year. Overall price stability had already deteriorated before the war, and the practice of cutting interest rates to stimulate the economy is seen as taboo for the central bank under the current circumstances" datetime: "2026-04-13T07:03:14.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/282500666.md) - [en](https://longbridge.com/en/news/282500666.md) - [zh-HK](https://longbridge.com/zh-HK/news/282500666.md) --- # Soaring inflation shatters dreams of interest rate cuts, how will the next Federal Reserve chair report to Trump? Leading the Federal Reserve is often considered one of the best jobs in the world. However, overseeing the U.S. central bank under Donald Trump's presidency is quite a tricky task. Current Federal Reserve Chairman Jerome Powell frequently faces fierce criticism from the president. Last month, as Trump's war in Iran caused a significant market downturn, he questioned on his social network "Truth Social": "Where is Federal Reserve Chairman Jerome 'Too Late' Powell today?" Additionally, Powell is facing a baseless investigation by the U.S. Department of Justice (DoJ) regarding the renovation bills for the Federal Reserve headquarters. Kevin Warsh may have hoped for an easier situation. In January of this year, when Trump nominated the former Federal Reserve governor to replace Powell, the market consensus was that there would be at least one or two interest rate cuts before the end of 2026, possibly even more. While this wouldn't bring the current rate of 3.5-3.75% down to the approximately 1% that the president occasionally demands, it might at least spare Warsh from becoming a target. Chart 1 However, since then, the reasons for rate cuts have evaporated (see Chart 1). Almost no one expects a rate cut this year. The most obvious reason is that the war in Iran has led to soaring oil prices. According to official data released on April 10, the overall inflation rate for March was pushed up to an annual rate of 3.3%, higher than the previous month's 2.4%. For similar reasons, next month's data may also be painful. Although a (temporary) ceasefire agreement has been reached in the Gulf region, oil prices still hover around $100 per barrel, a third higher than before the U.S. and Israel attacked the Islamic Republic at the end of February. Over time, oil shocks tend to spread to other prices in the economy: after all, energy is a cost input for almost everything. The U.S. experienced a similar situation after Russia invaded Ukraine in 2022. Lowering interest rates to stimulate the economy while prices are rising is largely a taboo for central banks. Complicating Warsh's situation further is that U.S. price stability was already deteriorating before the war broke out. Trump's tariff shocks may have been one-off events; as importers gradually passed on costs to consumers, they raised the overall price level of goods but did not push up the inflation rate. However, service sector inflation, which is less volatile and better reflects the degree of economic overheating, has already stopped its downward trend. Chart 2 If we exclude housing factors (as rents are typically reset annually and their prices often lag behind other prices), the rate of increase in service prices—from haircuts, car rentals to mobile phone plans—has accelerated by about 0.75 percentage points compared to the average level in the 2010s, when the inflation rate consistently remained at the Federal Reserve's target level of 2% (see Chart 2). This gap is not large, but it indicates that inflationary pressures have not been completely squeezed out of the U.S. economy, making additional monetary stimulus measures difficult to justify. This is a blow to Walsh's interest rate cut plan at the level of real data. Another challenge is theoretical—but its power is undiminished. As a former "inflation hawk," he gained Trump's favor because he argued that the productivity growth brought by artificial intelligence provides a reasonable justification for significant interest rate cuts. This argument has always been untenable. If artificial intelligence can indeed significantly boost the productivity of American workers in the short term, the correct monetary policy response is likely to be raising interest rates. This is because the "neutral interest rate"—the rate that neither stimulates nor suppresses economic output—tends to rise and fall with fluctuations in the economy's potential growth rate. Furthermore, so far, the most obvious economic impact of the AI boom has been a massive wave of investment in data centers. This large-scale investment of billions of dollars into the economy is contrary to the idea of cutting interest rates. In recent months, several senior Federal Reserve officials have expressed their disagreements with Walsh's "AI optimism" (although they have diplomatically avoided naming him directly). Federal Reserve Vice Chair Philip Jefferson stated in a speech in February that artificial intelligence is likely to push up inflation in the short term and raise the neutral interest rate in the long term. Later that month, another Federal Reserve Governor, Michael Barr, also delivered a speech with similar views. Even Powell has weighed in on this topic. In a recent Federal Reserve press conference, he told The Economist that regarding artificial intelligence, "what you see is not something that would immediately call for interest rate cuts or lower inflation." Powell has now also confirmed that he does not intend to resign from the Federal Reserve Board after his term as chair ends in May, at least not until the Department of Justice concludes its investigation. Theoretically, he could remain on the board until early 2028. If some hardline Republican senators follow through on their promise not to approve any new Federal Reserve appointments (including Walsh) until the Department of Justice investigation is concluded, Powell might even continue to serve as chair after May. Meanwhile, Jefferson and Barr's terms will extend into the 2030s. Therefore, in the coming years, each of them can continue to express their dissatisfaction and disagreements with Walsh. Walsh has successfully sweet-talked the president into handing him the Federal Reserve position. Given that Trump's mess in Iran has made interest rate cuts more complicated, explaining to the president why he cannot get the cuts he wants will likely require even more flattering and ingratiating rhetoric. (Translated by Chen Zhaoyu) ## Related News & Research - [Fed meeting: Key questions as Powell passes torch to Warsh](https://longbridge.com/en/news/284617867.md) - [Fed Chair Powell: Widespread concerns that White House infringements could continue](https://longbridge.com/en/news/284631826.md) - [Powell to stay on Federal Reserve board as policy makers hold rates steady](https://longbridge.com/en/news/284638464.md) - [IRAN'S SUPREME LEADER SAYS A NEW CHAPTER FOR THE GULF AND STRAIT OF HORMUZ IS TAKING SHAPE - POST ON X](https://longbridge.com/en/news/284750392.md) - [IRAN'S SUPREME LEADER SAYS TEHRAN WILL SECURE THE GULF REGION AND ELIMINATE 'THE ENEMY'S ABUSES OF THE WATERWAY' - STATEMENT](https://longbridge.com/en/news/284750957.md)