President Donald Trump tapped Kevin Warsh as his pick to succeed Jerome Powell at the Federal Reserve in large part because he wanted a chair willing to cut interest rates aggressively.
After Tuesday’s April Consumer Price Index report, the path Warsh inherits looks nothing like the one Trump campaigned for.
The headline Consumer Price Index rose 3.8% year-over-year in April, topping the 3.7% consensus and marking the hottest reading since May 2023, as the Strait of Hormuz energy shock fed through the consumer basket.
Core inflation re-accelerated to 2.8%, also above expectations, while core services excluding shelter — the Fed’s preferred underlying gauge — jumped to 0.5% month-over-month.
Within minutes of the print, fed funds futures executed a sharp hawkish repricing.
Rate-Hike Odds Jump After Hot Inflation Print
According to CME FedWatch, traders are now pricing a 51% probability of a Fed rate hike to the 3.75-4.00% range by the Jan. 27, 2027, meeting, and over 80% by April 2027.
Cut probabilities for 2026 have effectively been wiped out.
| FOMC Meeting Date | 1 cut (-25 bps) | Hold at 3.50%-3.75% | 1 Hike (+25 bps) |
|---|---|---|---|
| 06/17/2026 | 2.36% | 97.64% | 0.00% |
| 07/29/2026 | 4.50% | 95.50% | 0.00% |
| 09/16/2026 | 0.00% | 96.00% | 4.00% |
| 10/28/2026 | 0.00% | 80.50% | 19.50% |
| 12/09/2026 | 0.00% | 62.28% | 37.72% |
| 01/27/2027 | 0.00% | 48.50% | 51.50% |
| 03/17/2027 | 0.00% | 29.21% | 70.79% |
| 04/28/2027 | 0.00% | 18.50% | 81.50% |
| 06/09/2027 | 0.00% | 19.18% | 80.82% |
| 07/28/2027 | 0.00% | 22.50% | 77.50% |
| 09/15/2027 | 0.00% | 32.72% | 67.28% |
| 10/27/2027 | 0.00% | 77.50% | 22.50% |
| 12/08/2027 | 0.00% | 51.89% | 48.11% |
Bank of America: The Fed Is ‘Running Out Of Excuses’
Bank of America economist Stephen Juneau didn’t mince words in a note to clients Tuesday, highlighting that the Fed is “running out of excuses.”
“Our read-through to core PCE inflation is problematic for the Fed, even if we ignore the 4-5 basis point one-off housing boost,” Juneau wrote. The bank is now tracking April core PCE — the Fed’s preferred inflation gauge — at 0.30% month-over-month and 3.3% year-over-year.
The most uncomfortable detail in the report wasn’t energy, where the Hormuz blockade did most of the damage with a 3.8% monthly jump and a 17.9% year-over-year surge. It was services.
“Core services inflation was uncomfortably elevated,” Juneau wrote. “Investors should look through the outsized housing print, which was payback for the effect of the shutdown on the October data.
The concern is that core services ex housing came in at 0.5% m/m, led by large increases in airfares, lodging away from home and other personal services.”
Airline fares jumped 2.8% on the month — the second consecutive elevated print after March’s 2.7% — pushing the year-over-year rate to a striking 20.7%, the highest in years.
Lodging away from home surged 2.4%, while other personal services climbed 1.2%.
Bank of America now sees rising risk that core PCE settles in the 2.5-3.0% range even after tariff effects roll off, a level that would preclude any additional rate cuts.
“We remain comfortable with our view that the Fed will be on hold until 2H 2027,” Juneau added.
“Markets are even starting to price hikes. In our view, the u-rate would have to drop to/below 4% for hikes to be on the table. We are still some ways away from this outcome.”
The Warsh Paradox
Trump’s preferred Fed Chair pick was selected for a specific reason: Warsh has been on the dovish-pivot side of the public debate in recent months, and Trump made clear he wanted aggressive rate cuts to support equity valuations and his economic agenda.
But the inflation reality Warsh would walk into is the opposite of what the White House bet on.
With core services running at 0.5% month-over-month, energy still rising through May, and the labor market holding up, the Fed has very little statistical cover to cut.
Even more pointedly, Bank of America now sees a hike as more plausible than a cut over the next 12-18 months.
“Given that inflation is heading in the wrong direction and the labor market is holding up, it’s very unlikely that the Fed will be able to lower interest rates any time soon,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
“It’s possible that we may start pricing in rate hikes for next year.”
The Counterargument: This Inflation Scare Will Pass
Not every desk is hitting the panic button.
Oxford Economics lead U.S. Economist Bernard Yaros indicated in a note Tuesday that while the print was “uncomfortably strong,” core CPI is set to trend sideways through year-end rather than spiral higher.
Yaros highlighted that part of April’s core strength was a statistical quirk: a distortion linked to last fall’s government shutdown artificially boosted shelter inflation, particularly the rent of primary residence and owners’ equivalent rent components.
The firm still pushed back its forecast for the next Federal Reserve rate cut from June to December but stopped short of a more hawkish revision.
“Energy-driven cost increases will spill over to the core CPI, but these effects will be tempered by ongoing housing disinflation, a lukewarm labor market, and fading tariff effects,” Yaros wrote.
He noted apparel — up 4.2% year-over-year — still bears tariff fingerprints, while airline fares, up 20.7% year-over-year, reflect the passthrough from jet fuel.
Wall Street Takes The First Punch
The S&P 500 – tracked by SPDR S&P 500 ETF Trust (NYSE:SPY) – was off 0.8% to 7,353.09 on Tuesday, while the Nasdaq 100 – tracked by the Invesco QQQ Trust (NASDAQ:QQQ) – dropped 1.93% to 28,756 as the higher-for-longer reality hit duration-sensitive growth names hardest.
The Dow Jones Industrial Average slid 0.33% to 49,543.
Within tech, the steepest losses came from semiconductor and memory names that had sharply rallied in recent weeks. Qualcomm Inc. (NASDAQ:QCOM) plunged 12.99%, Sandisk Corporation (NASDAQ:SNDK) dropped 9.16%, Intel Corporation (NASDAQ:INTC) slid 9.05%, Micron Technology Inc. (NASDAQ:MU) tumbled 8.57%, Western Digital Corp. (NASDAQ:WDC) lost 7.87%, and Seagate Technology Holdings PLC (NASDAQ:STX) fell 6.83%.
Precious metals also took a hit on the higher-real-rates implication. SPDR Gold Shares (NYSE:GLD) tracking spot gold dropped 1.5%, as metal slid to $4,666.26 per troy ounce, while iShares Silver Trust (NYSE:SLV) tracking silver fell 2.3%.
Photo: © Jack Gruber / USA TODAY NETWORK via Imagn Images
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