Kevin Warsh is still months away from officially taking the helm of the Federal Reserve, but analysis indicates that he faces significant obstacles in fulfilling President Trump's anticipated interest rate cut promise, as the trajectory of the U.S. economy and his future Federal Reserve colleagues are leaning in the opposite direction.
Most Federal Reserve officials believe there is no compelling reason to rush into further rate cuts, given that U.S. inflation remains elevated and the labor market appears to be stabilizing. The largest increase in oil prices in four years, triggered by renewed conflicts in the Middle East, may only exacerbate their cautious stance.
Moreover, several policymakers have expressed skepticism about the core ideas supporting Warsh's vision for rate cuts. This vision is based on two foundations: first, that a technological revolution is about to bring about an era of low-inflation economic prosperity; and second, his commitment to reducing the size of the Federal Reserve's balance sheet.
All of this is happening while Warsh has not yet officially received his nomination, and his confirmation process in the U.S. Senate faces opposition from within the Republican Party, due to the ongoing investigation by the U.S. Department of Justice into current Federal Reserve Chairman Jerome Powell, whose term ends in May.
Analysis suggests that even if these issues are resolved, if Warsh pushes for significant and immediate rate cuts, he may still encounter strong resistance and potential friction with the White House. This also means he may struggle to fulfill a key responsibility of the Federal Reserve Chair: to present economic arguments that can persuade colleagues and build consensus. If Warsh wants to implement a series of rate cuts later this year, such as four cuts, he will not secure enough votes unless there are unexpected changes in the data. In this scenario, such policies would not be appropriate.
<h2>Let the Data Speak</h2>
After three consecutive rate cuts at the end of 2025, the Federal Reserve held steady at its January meeting this year, citing improvements in the labor market and concerns about stubborn inflation. By the end of 2025, U.S. inflation is still nearly one percentage point above the Federal Reserve's 2% target.
The subsequent January non-farm payroll report in the U.S. exceeded expectations, and most policymakers agreed that the labor market is stabilizing. Some Federal Reserve officials, such as Cleveland Fed President Loretta Mester, who has voting rights this year, indicated that they expect interest rates to remain unchanged for a period. Even Federal Reserve Governor Christopher Waller, who advocated for a 25 basis point rate cut in January, acknowledged that if the labor market continues to improve, rates may remain unchanged at the March 17-18 meeting.
According to the minutes of the January FOMC meeting, some Federal Reserve officials even considered that if inflation remains above target, the Federal Reserve may need to raise rates.
Recently, oil prices surged nearly 20% under the initial impact of the U.S. going to war with Iran. Traders on Tuesday reduced bets on more than one 25 basis point rate cut this year. New York Fed President John Williams stated that the impact on inflation will depend on how long high oil prices persist.
Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve economist, stated that later this year, the Federal Reserve may face a scenario of falling inflation and a robust labor market, paving the way for Warsh to implement &#34;good news&#34; rate cuts during his tenure. However, Federal Reserve officials are currently in a phase of letting the data speak, waiting for further improvements in inflation
<h2>Doubts About AI-Driven Prosperity</h2>
Despite most data not yet supporting interest rate cuts, Waller still hinted that structural changes in the U.S. economy might be sufficient to support rate cuts. He pointed to the rise of artificial intelligence and compared it to the internet boom of the 1990s. At that time, productivity soared, temporarily lowering inflation and interest rates, allowing then-Federal Reserve Chairman Alan Greenspan to let the economy run &#34;hot.&#34;
Waller wrote last November: &#34;Artificial intelligence will become an important disinflationary force, increasing productivity and enhancing U.S. competitiveness.&#34; In a discussion this February, Waller stated, &#34;I don't think the growth and productivity we've seen in the last year or two comes from AI. I don't think any of us believe that's the main driver.&#34;
Productivity gains are crucial because labor costs are the largest expense for many businesses. When companies use technology and equipment to increase output, they can drive economic growth without triggering wage-driven inflation.
In fact, recent U.S. labor productivity has seen significant improvement. Over the past 50 years, the annualized growth rate of output per hour in the U.S. non-farm sector has averaged 1.9%; in the last 10 quarters, it has averaged 2.7%; and in the third quarter of 2025, it reached as high as 4.9%. However, since Trump nominated Waller, several Federal Reserve officials have clearly stated that they do not believe the current economy has the same conditions as in the 1990s.
Skeptics' logic is that it is too early to judge whether AI is driving productivity gains; even if true, large-scale AI investments may imply a need for higher interest rates at least in the short term. Other explanations for the productivity surge include investments in other labor-saving technologies and a wave of new business startups.
Federal Reserve governors Michael Barr, Lisa Cook, and Vice Chairman Philip Jefferson have also expressed similar doubts. Kansas City Fed President Jeff Schmid stated on Tuesday that while he is optimistic about AI and other emerging technologies eventually leading to non-inflationary growth, &#34;we're not there yet.&#34;
<h2>Resistance to Balance Sheet Reduction</h2>
Another pillar of Waller's advocacy—reducing the Federal Reserve's $6.6 trillion balance sheet to create room for interest rate cuts—has also not gained widespread support among policymakers or Wall Street.
The expansion of the Fed's balance sheet partly stems from the need for additional stimulus when benchmark interest rates were lowered to zero during the global financial crisis, as well as further expansion during the pandemic.
Waller previously wrote: &#34;The bloated balance sheet designed to support large corporations during a crisis can be significantly reduced. This easing can be redeployed as lower interest rates to support households and small businesses.&#34;
Although Waller has the support of U.S. Treasury Secretary Scott Bessent, analysts warn that the process is fraught with risks and will take a long time. Relying solely on allowing securities to mature naturally could lead to a liquidity crunch in the short-term funding markets, causing severe volatility, as occurred in 2019.
Analysts point out that the Federal Reserve could relax the requirements for banks to hold large reserves or shorten the average maturity of U.S. Treasury securities held, but these measures cannot be implemented quickly and have limited effects
A more aggressive approach would be to return to the interest rate control system before the financial crisis—when bank reserves were extremely low, but the benchmark interest rates fluctuated more significantly.
To reassure the market, Bessenet stated that he expects the Federal Reserve to act cautiously. &#34;I don't think they will act quickly. They have already shifted to an ample reserves regime, which indeed requires a larger balance sheet. I think they may take at least a year to decide what to do next.&#34;
In a scene that foreshadows future debates, Waller more bluntly opposed returning to a &#34;scarce reserves&#34; regime. He said, &#34;You wouldn't want banks rummaging through couch cushions for cash every night. It's both extremely inefficient and foolish.&#34;

CBOE

Given that inflation in the United States remains high and the labor market seems to be stabilizing, most Federal Reserve officials believe there is no compelling reason to rush into further rate cuts. Some policymakers have expressed skepticism about Waller's vision for rate cuts, which is centered on the belief that AI is about to bring about a low-inflation economic boom. Waller's ability to cut rates faces significant obstacles, as the U.S. economy and its future Federal Reserve colleagues are moving in the opposite direction, which could trigger potential conflicts with the White House

- Kevin Warsh's potential appointment as Federal Reserve Chair faces challenges, particularly regarding President Trump's interest rate cut promises in light of economic trends and opposition from Fed colleagues.  
- Most officials believe there's little justification for rapid rate cuts due to persistent inflation and a stabilizing labor market, compounded by rising oil prices from Middle East conflicts.  
- Warsh's views on artificial intelligence driving productivity and a proposed reduction of the Fed's balance sheet lack broad support, with skepticism from multiple policymakers about the economy's readiness for such moves.

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Before taking office, Waller faces numerous challenges, as Federal Reserve colleagues question the surge in oil prices, which may make it difficult for him to fulfill Trump's dream of interest rate cuts