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Inflation drives rate-cut debate at Warsh's first Fed meeting as chair

By Mary Helen Gillespie TheStreet

Updated June 9, 2026 11:22 AM

Consumers expect it.

Bond traders dread it.

And analysts are watching it all very closely.

Rising prices are driving higher inflation anxiety for Americans even as the labor market seems to stabilize.

All of which could complicate the Fed's interest-rate strategy heading into Kevin Warsh's first policymaking meeting June 16-17 as Chair of the U.S. central bank.

At stake: the cost of short-term borrowing that influences mortgages, credit cards and auto loans.

MissionSquare Chief Investment Officer Shari Hensrud told TheStreet in an email that "strong job growth and high inflation are pulling in opposite directions."

The May Consumer Price Index will be released June 10. Some economists forecast the newest CPI read to hit 4%. The last time the CPI was at that high level was May 2023.

Meanwhile the latest jobs report released June 5 showed a significant headline surprise with much stronger job growth than consensus estimates expected.

On one hand, the economy looks healthy, but on the other, prices are still rising too quickly, Hensrud said.

Will sticky inflation force Warsh's Fed to raise interest rates?

For Fed policymakers, the challenge is increasingly clear that they must balance mounting pressure to support the labor without reigniting inflation that remains much higher than the Fed's own 2% target.

"That tension can't last forever,'' Hensrud said, adding that the U.S. economic conundrum will likely resolve one of two ways:

Either inflation cools, which would support risk assets and allow the benchmark Federal Funds Rate to move lower.
Or higher rates and rising costs start to slow the economy, which could pressure equities and widen credit spreads plus prompt an interest-rate hike.

NY Fed study measures consumer expectations around prices, jobs

The latest Survey of Consumer Expectations from the New York Fed released June 8 showed one-year inflation expectations easing to 3.5% in May.

But longer-term consumer views remained stable, suggesting that households still believe Fed policymakers can keep price pressures under control.

Yet at the same time, consumer confidence in the job market deteriorated sharply in May with the perceived likelihood of finding a new job falling to its lowest level since December 2025 with concerns about future job losses climbing.

Key takeaways from Fed study on inflation, jobs

Inflation expectations improved slightly in May for consumers, according to the New York Fed study:

One-year inflation expectations fell to 3.5% from 3.6%.
Three-year expectations held at 3.1%.
Five-year expectations remained at 3.0%.

This suggests households see inflation easing modestly in the near term while maintaining relatively stable longer-run inflation expectations. This is a development policymakers generally view favorably.

But confidence in the labor market slumped.

The perceived probability of finding a new job after losing one's current position fell to 43.7%, the lowest level since December 2025.
The perceived probability of losing a job over the next year rose to 15.1%.

And of those surveyed, fewer respondents expect credit to become easier to obtain in the next year showing continued concerns about borrowing conditions and consumer finances.

Fed's mandate requires a tricky balance

The Fed's dual mandate from Congress requires maximum employment and stable prices.

Lower interest rates support hiring but can fuel inflation. This risks fueling further inflation, potentially leading to an inflationary spiral.
Higher rates cool prices but can weaken the job market. This increases the cost of borrowing and further stifles economic activity.

The FOMC continued to hold the funds rate -- which impacts the cost of short-term borrowing -- steady at 3.50% - 3.75% during its April 30 meeting.

This came after policymakers cut rates by 25 basis points at its last three meetings of 2025 to shore up the softening labor market.

As I've reported, President Donald Trump and other White House officials are repeatedly calling for the Fed to slash rates dramatically to 1% or lower, mainly to reduce the amount of interest on the nation's $38.91 trillion debt.

Bond traders hope for Fed rate hike

Some Fed officials and many analysts are forecasting that the FOMC will either hold rates steady for awhile or raise interest rates as soon as the end of the year if not sooner due to increasing price pressures.

"Show me where rates are being restrictive," Jack McIntyre, portfolio manager at Brandywine Global Investment Management, told Bloomberg June 9.

"Treasury yields are going to be biased higher until something breaks," McIntyre said.

Markets brace for May CPI report

According to the latest Cleveland Fed Inflation Nowcasting model, the May CPI read is expected to hit 4% and the May Personal Consumption Expenditures inflation report -- the Fed's preferred inflation gauge due May 28 -- is projected at 3.99% when it is released June 25.

The Fed's own annual target of 2% inflation has not been met in five years, mostly due to the lingering impact of the pandemic but tariffs and energy shocks have caused the recent spikes.

"For the first time in a while, we are considering a scenario where the U.S. economy actually starts overheating," Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management, told Bloomberg June 9.

Skiba cited a ramp up in artificial intelligence spending into an already-robust economy.

Skiba said the scenario isn't his base case, adding he's keeping his interest-rate exposure close to benchmarks as he waits to see whether Warsh comes out as dovish or hawkish.

The CME Group FedWatch Tool shows a near 100% probability that the FOMC will hold rates steady this month and a 83.7% chance it will do the same at its July meeting.

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This story was originally published June 9, 2026 at 11:17 AM.