--- title: "Before arrival, the road is already difficult! The path to interest rate cuts by the Federal Reserve under Jerome Powell faces multiple headwinds - colleagues' doubts, data divergence, and obstacles in balance sheet reduction" type: "News" locale: "zh-HK" url: "https://longbridge.com/zh-HK/news/277623764.md" description: "Kevin Warsh is set to take over the Federal Reserve, but his interest rate cut plan faces multiple challenges, including economic data not supporting a rate cut, skepticism from colleagues, and rising oil prices due to the Middle East conflict. Most Federal Reserve officials believe there is no need for further rate cuts, and Warsh's rationale for cutting rates is under scrutiny. Even if he successfully obtains the nomination, Warsh may find it difficult to push for a rate cut and will need to present compelling economic arguments to gain support" datetime: "2026-03-03T14:29:04.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/277623764.md) - [en](https://longbridge.com/en/news/277623764.md) - [zh-HK](https://longbridge.com/zh-HK/news/277623764.md) --- > 支持的語言: [简体中文](https://longbridge.com/zh-CN/news/277623764.md) | [English](https://longbridge.com/en/news/277623764.md) # Before arrival, the road is already difficult! The path to interest rate cuts by the Federal Reserve under Jerome Powell faces multiple headwinds - colleagues' doubts, data divergence, and obstacles in balance sheet reduction According to Zhitong Finance APP, there are still months to go before Kevin Warsh officially takes charge of the Federal Reserve, but his ability to fulfill the interest rate cut promise expected by President Trump faces significant obstacles—the actual trajectory of the U.S. economy and the policy tendencies of his future Federal Reserve colleagues are pointing in the opposite direction. Given that inflation remains high and the labor market seems to have stabilized, most Federal Reserve officials believe there is no urgent need for further interest rate cuts. The resurgence of conflict in the Middle East, leading to the largest oil price surge in four years, will only make them more hesitant. Several policymakers have also expressed skepticism about the core logic supporting Warsh's vision for interest rate cuts. This vision is based on two major commitments: first, that a technological revolution will soon bring about low-inflation economic prosperity; second, that he will reduce the Federal Reserve's balance sheet. All of this occurs before Warsh has received formal nomination and against the backdrop of his Senate confirmation process facing opposition from Republicans—who are dissatisfied due to the Justice Department's investigation into current Federal Reserve Chairman Jerome Powell (whose term ends in May). Even if the aforementioned obstacles are cleared, the current dynamics suggest that if Warsh pushes for immediate significant interest rate cuts, he may encounter strong resistance, potentially creating a flashpoint with the White House. This also means that Warsh may struggle to fulfill a key part of the Federal Reserve Chair's responsibilities: presenting a compelling economic argument to garner support from colleagues and build consensus. "If Chairman Warsh wants to propose a series of interest rate cuts—like cutting rates four times in the second half of the year—unless the data is surprising, I don't think he will get enough votes," said William English, a professor at Yale School of Management and former director of the Federal Reserve's division. "The outlook does not support such a policy." ## "Seeing is Believing Stage" After cutting rates three times by the end of 2025, Federal Reserve policymakers kept rates unchanged in January, citing improvements in the labor market and ongoing concerns about inflation stickiness—last year's inflation rate was still nearly a percentage point above the 2% target. Boosted by an unexpectedly strong employment report in January, most policymakers acknowledged the view that the labor market is stabilizing. A few officials, including Cleveland Fed President Loretta Mester (who has voting rights this year), indicated that they expect rates to remain "unchanged for a while." Even Christopher Waller, a board member who called for a 25 basis point cut in January, has acknowledged that improvements in the labor market may mean that the March 17-18 meeting should also remain on hold. The minutes from the January meeting showed that several officials even considered the possibility that if inflation remains above target, the Federal Reserve may need to raise rates. Claudia Sam, chief economist at New Century Advisors and former Federal Reserve economist, stated that the Federal Reserve may still see a slowdown in inflation and a stable labor market later this year, providing "good news" room for rate cuts during Warsh's tenure. However, she added that for now, officials are in the "seeing is believing stage," waiting for further progress on inflation ## AI skepticism Despite most data not supporting interest rate cuts, Walsh still hinted that greater structural changes in the U.S. economy might provide reasons for lowering rates. He compared the booming development of artificial intelligence to the internet boom of the 1990s, when productivity soared and helped suppress inflation and interest rates for a time. Productivity gains are crucial because labor costs are the largest expense for many businesses. When companies can leverage technology and equipment to increase output, they can drive economic growth without triggering wage-driven inflation. "AI will become an important anti-inflationary force, increasing productivity and enhancing U.S. competitiveness," Walsh noted in an opinion piece last November. Recently, labor productivity has indeed surged significantly. Over the past 50 years, the quarterly annualized growth rate of output per hour for non-farm employees has averaged 1.9%. In the last 10 quarters, this average has reached 2.7%, peaking at 4.9% in the third quarter of 2025. ![Walsh.png](https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20260303/1772542103856564.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) However, in the weeks following Trump's announcement of Walsh as a Federal Reserve candidate, several Federal Reserve officials have made it clear that they still do not believe the current economy is experiencing conditions similar to those of the 1990s—when then-Chairman Alan Greenspan was able to let the economy run hot. Skeptics' logic is as follows: it is too early to assert that AI is driving the current productivity growth; even if it is, the massive scale of AI investment may mean that interest rates need to remain at higher levels, at least in the short term. Other possible explanations for the productivity leap include investments in other labor-saving technologies and a surge in new business formations. "I don't think I'm the only one who sees it this way, but the productivity growth we've seen in the past year or two is not coming from AI," Waller, who was a leading candidate for Federal Reserve Chair before Walsh was selected, said during a panel discussion on February 23. "I don't think any of us believe that is the main driver." Other Federal Reserve officials, including governors Michael Barr, Lisa Cook, and Vice Chair Philip Jefferson, have also expressed similar concerns. ## Balance Sheet Reduction Resistance Another pillar of Walsh's outlook—the reduction of the Federal Reserve's $6.6 trillion balance sheet to create space for interest rate cuts—has also not gained support among policymakers or Wall Street. The size of the Federal Reserve's securities holdings has ballooned, partly because officials judged that more stimulus was needed during the global financial crisis (when the benchmark interest rate hit zero) and during the pandemic. "The Federal Reserve's balance sheet, which has expanded to support large corporations during past crises, can be significantly reduced," Walsh pointed out in his article last November. "This massive sum can be redeployed in the form of lower interest rates to support households and small businesses." However, despite Walsh receiving support from Treasury Secretary Scott Bessen, analysts warn that the process is fraught with risks and will take a long time. Simply allowing securities to mature naturally could lead to liquidity depletion, triggering severe fluctuations in the short-term financing market, as occurred in 2019. Analysts state that the Federal Reserve could relax the rules requiring banks to hold large cash reserves at the central bank or shorten the average maturity of their Treasury holdings, but they add that these measures cannot be completed quickly and have limited effects. Another more radical step would be to revert to the way the Federal Reserve controlled interest rates before the financial crisis—this system maintained bank reserves at absolute minimum levels but led to increased volatility in benchmark rates. To reassure the market, Bessen stated that he expects the Federal Reserve to act cautiously. "I don't expect them to take any swift action," he said in a news interview on February 8. "They have shifted to a plentiful reserves regime, which indeed requires a larger balance sheet, so I think they are likely to delay action and take at least a year to decide what they want to do." A sign of future debates is that Waller has been more outspoken in rejecting a return to a "scarce" reserves regime. "You can't expect banks to rummage through their couch cushions every night looking for money," he said earlier this month. 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