Rabobank's Senior US Strategist Philip Marey notes that Kevin Warsh may initially avoid pushing for immediate rate cuts, instead laying out an analytical framework to justify resuming pre-war easing later in 2026. Marey highlights the supply‑shock nature of current inflation, the importance of anchored expectations, and Warsh’s controversial AI‑driven productivity argument, which several FOMC members reportedly doubt.

Supply shock narrative to justify cuts

"A sensible approach for Warsh would be to refrain from pushing for rate cuts in June and July, but instead introduce the analytical framework that will allow the FOMC to resume its prewar path of rate cutting later in the year."

"If the current surge in inflation is purely a supply shock, the Fed should be able to look through the high headline inflation figures and focus on core inflation and inflation expectations. If core inflation picks up substantially and inflation expectations become unanchored, then inflation pressures could become persistent."

"However, if we see only a modest rise in core inflation and long-run inflation expectations remain stable, the Fed could resume its pre-war interest rate path, which was sloping downward."

"In fact, the FOMC appears susceptible to this argument. At the March 18 post-meeting press conference, Powell said that looking through inflation caused by the energy price shock would be dependent on inflation expectations remaining anchored and the fact that inflation has been above target for five years."

"Warsh may have more difficulty selling his AI argument for cutting rates. He thinks that the boost to productivity caused by artificial intelligence will outweigh the increase in aggregate demand and therefore reduce inflationary pressures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)