Federal Reserve quickly running out of reasons to cut interest rates

The Federal Reserve is quickly running out of reasons to cut interest rates, and the evidence mounted further on Friday with an April jobs report that showed the American labour market stabilising just as inflation resumed its climb.

Nonfarm payrolls rose by 115,000 last month, nearly double the 65,000 economists had pencilled in, while the unemployment rate held steady at 4.3 per cent. The consumer price index for March pointed to an inflation rate of 3.3 per cent, well above the central bank’s 2 per cent target, and the most recent three months of readings have ticked higher rather than lower. Taken together, the data are closing the window on the near-term rate cuts that markets had priced in through much of early 2026, forcing a repricing that now sees negligible odds of a reduction through at least the middle of 2027.

“The Fed will shift its focus to containing upside inflation risks now that the labour market appears back on track,” said Lindsay Rosner, head of multisector fixed income at Goldman Sachs Asset Management. “The FOMC could well feel compelled to remove the easing bias from its next post-meeting statement in June, which would suggest the hawks are gaining the upper hand on the committee for the time being.”

A labour market that no longer needs help

The 115,000 April payrolls figure was modest, but combined with an upward revision that took the March number to 185,000, it settled the argument that the jobs market requires monetary relief. Three months ago the labour picture looked shakier, and Fed officials had openly discussed the risk of waiting too long to ease. That risk has faded.

“If unemployment stays this stable, the Fed’s attention shifts back to inflation,” said Olu Sonola, head of U.S. economics at Fitch Ratings. The arithmetic is straightforward: a jobless rate at 4.3 per cent gives the Federal Open Market Committee no urgency to cut, and the traditional approach to above-target inflation with a steady labour market normally argues against easing.

Scott Clemons, chief investment strategist at Brown Brothers Harriman, said: “This makes it more and more clear that the Fed can have all the patience in the world. There is nothing on the economic front that’s requiring them to lower interest rates any further.”

Inflation going the wrong way

The inflation data have shifted the debate. The Fed’s preferred gauge has been above the 2 per cent target for five years. Progress stalled in the second half of 2025, and the opening months of 2026 have brought a renewed uptick, driven by the energy price shock from the Iran conflict and the residual effect of import tariffs imposed by the Trump administration.

“We’ve been above the 2 per cent fed target for five years now. We stopped making progress last year, and now the last three months, it’s going up instead of down,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, told CNBC on Friday. “We’ve got to just keep an eye on this, because if everybody starts presuming that inflation rates are going back to something like what they were a few years ago, we would be in a bit of a pickle as a central bank.”

Goolsbee noted that price pressure is no longer confined to petrol and tariff-affected goods. It is increasingly visible in services costs, the stickiest component of the inflation basket and the one most responsive to wage growth. Consumer sentiment, meanwhile, has tumbled to a record low of 48.2 in early May, according to the University of Michigan survey, as households feel the squeeze of prices that remain far above pre-pandemic levels. The FT’s latest polling put voter disapproval of the president’s economic management at 58 per cent.

The dissenters

At the Fed’s most recent meeting, three regional bank presidents voted against the post-meeting statement, the largest dissenting bloc since 1992. They did not object to the decision to hold rates at 3.50 to 3.75 per cent, where they have been since the December 2025 quarter-point reduction. Their objection was to the forward guidance language interpreted by markets as signalling the next move was more likely to be a cut.

Beth Hammack of the Cleveland Fed, one of the three, has argued publicly for “a pretty neutral stance” on the direction of the next move. Stephen Miran, a Fed governor whose term expires when the incoming chair is confirmed, argued that current policy may be “holding the job market back”. That view put him at odds with the majority of the committee, and he will not be around to press it much longer.

The dissent is procedural but the shift is real. The easing bias that survived through the December cut has lost its majority. Removing it at the June meeting, as Rosner and others expect, would signal that the rate-cutting cycle that began in late 2024 is over.

Warsh’s impossible brief

Kevin Warsh, the former Fed governor nominated by President Donald Trump to succeed Jerome Powell as chair, faces confirmation with a problem that did not exist when his name was floated: the economic data are making his stated policy preference for lower rates look increasingly undeliverable.

Warsh has been open about wanting a lower federal funds rate and has argued the Fed can control inflation while easing by shifting the emphasis to its $6.7 trillion balance sheet rather than the overnight rate. But selling a rate cut with inflation above 3 per cent, a stable labour market, and a committee that just recorded its biggest hawkish dissent in more than three decades is a difficult proposition.

“He has really got his hands full on this. Certainly he was chosen by Trump because he is probably leaning towards lower interest rates,” said Dan North, senior economist for North America at Allianz. “Warsh comes in, saying, ‘Gosh, I think it’d be great if we had a family fight once in a while.’ Well, I don’t think this was the fight he was expecting.”

Powell, whose term as chair expires on 15 May, plans to remain on the Board of Governors through 2028, breaking a 75-year precedent. Miran has speculated Powell’s continued presence may be “transitional” rather than an attempt to muddle the leadership line, but it adds another variable to Warsh’s already complicated inheritance.

What the banks now expect

Bank of America has scrapped its forecast for two rate cuts in September and October 2026 and now expects the first reduction no earlier than the second half of 2027. “We no longer expect the Fed to cut rates this year,” the bank’s global research team wrote. “Core inflation is too high, and moving up. Trend inflation has not shown clear signs of dipping below 3 per cent.”

LH Meyer, the policy analysis firm, has also removed its 2026 cut forecast, though it does not see a case for hikes either. The CME Group’s FedWatch tool, which tracks futures-implied probabilities, assigns less than even odds to a cut through the second half of 2027. Fed funds futures have removed any probability of a cut through April 2031, and the rate curve implies a stronger chance of increases than decreases over the medium term.

“Obviously it makes the Fed’s decision easier,” North said. “This just makes the decision that much easier to hold, and maybe in the next year, start leaning the bias the other way.”

What happens next

The June FOMC meeting is now the policy-signalling event of the year. If the committee drops the easing bias from its statement, as Goldman Sachs Asset Management expects, it will mark the formal end of the post-2024 cutting cycle and the beginning of an indefinite hold. The Fed has not sustained such a posture since before the global financial crisis.

For Warsh, the path narrows with each data release. He can either abandon his preference for lower rates and align with the committee’s hawkish tilt, or risk a credibility-damaging internal fight within months of taking office. For households and businesses, the result is a prolonged period of borrowing costs at their highest level in nearly two decades. The next rate cut has no date on the calendar.