The Federal Reserve is walking into its first policy meeting under new Chair Kevin Warsh carrying the weight of a decision that looks increasingly misguided. Last December, the central bank cut rates for a third straight time despite internal disagreement. Now, the economic data suggests that move may have been a significant miscalculation.
Six months ago, Fed officials were sharply divided over whether to lower rates again. The rate-cutting camp prevailed, and then-Chair Jerome Powell managed to secure consensus for a reduction, though two officials dissented. Since that decision, the economy has moved in ways that challenge the reasoning behind that cut.
Job growth has accelerated, not weakened as some officials feared. The unemployment rate has held steady at 4.3% for three consecutive months, and employers have added an average of 114,000 workers monthly so far this year. This stands in stark contrast to 2025, when job creation had nearly flatlined at just 10,000 per month. The labor market concerns that animated the December rate cut appear to have been overstated.
Inflation has proven far more stubborn. Core Personal Consumption Expenditures inflation, which excludes food and energy, was tracking at 2.8% year over year when officials voted in December. The Fed's median expectation at that time was for it to fall to 2.5% this year. Instead, core PCE has reaccelerated to 4.1% on an annual basis through the first four months of 2026. Overall inflation, boosted by energy prices, is running at 5.5% annually.
The timing creates an awkward situation for Warsh. Interest rates are now providing stimulus to an economy that appears to need the opposite. A labor market showing genuine resilience combined with accelerating inflation suggests the Fed may have overextended its easing cycle.
Fed Governor Christopher Waller has already shifted his position dramatically. Six months ago, he described a December rate cut as "additional insurance against an acceleration in the weakening of the labor market." Last month, with job data stronger and inflation climbing, Waller said labor market concerns would not be "a major factor" in his thinking going forward. Inflation, he made clear, is now the pressing issue. He said he would not hesitate to raise rates if inflation expectations became unanchored.
The political backdrop of the December decision remains noteworthy. A vocal contingent of regional Fed presidents pushed back against further rate cuts. For a time, it appeared the December vote would produce the most dissents in decades. Powell's ability to corral a consensus, while impressive as a political maneuver, may have come at the cost of sound monetary policy.
That outcome now has markets pricing in meaningful odds of rate increases later this year. The question facing Warsh is whether the Fed can credibly signal a shift in direction without appearing to chase its own tail or worse, appearing reactive rather than forward-looking.
The core issue is structural: rate policy operates with long lags, making it genuinely difficult to say with certainty whether the December cut caused the inflation reacceleration and labor market resilience. But the practical result is clear. The dial appears to be set for an economy that no longer exists, pumping stimulus into conditions that may not require it.
Author James Rodriguez: "The Fed essentially bet that labor market weakness was the bigger problem and lost. Now Warsh has to manage the fallout without looking like the institution lost its grip on inflation control."
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