Don't count on more rate cuts soon
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Illustration: Eniola Odetunde/Axios
The job market looks to have firmed up. Inflation hasn't been fully vanquished. And the AI boom could have large, but highly uncertain effects on both.
The big picture: For those reasons, it's best not to take further interest rate cuts in the coming months as a given, based on the minutes of the latest Federal Reserve policy meeting released Wednesday as well as other recent remarks from top officials.
- Trump administration officials — and Kevin Warsh, the president's nominee to lead the central bank — make the case for significant further reductions in borrowing costs.
- But it's becoming clear that Warsh will face significant opposition from legacy Fed policymakers, at least if the data progresses as it looks most likely to now.
Driving the news: Minutes of the Federal Open Market Committee meeting that concluded on Jan. 28 showed that several officials "indicated that they would have supported a two-sided description of the Committee's future interest rate decisions, reflecting the possibility that upward adjustments" to rates could be appropriate.
- The minutes also stated that most policymakers cautioned that progress toward 2% inflation "might be slower and more uneven than generally expected" and that the risk of inflation persistently coming in too hot "was meaningful."
- Those remarks point to some wariness among Fed policymakers about moving too abruptly with further rate reductions after three quarter-point cuts in the final months of 2025.
State of play: Warsh has emphasized that AI advances, along with tax and deregulatory policies, allow rapid GDP growth without inflationary pressure, thus justifying further rate reductions.
- But there are ways the AI boom is affecting the job market, inflation and neutral interest rates that don't all head in the same direction.
Zoom in: To the degree that AI reduces demand for labor and leads to a weaker job market, that bolsters the case for rate cuts based on the Fed's employment mandate.
- Conceptually, a rise in trend productivity raises the neutral rate of interest, at which the economy is neither slowed nor stimulated, as it implies higher returns on capital.
- In the near term, the AI boom could even stoke inflation, by increasing demand for electricity and pushing up utility costs and by creating shortages of semiconductors and other inputs that cause prices to rise.
What they're saying: "Even if AI ultimately succeeds in greatly enhancing the productive capacity of the economy, a more immediate increase in demand associated with AI-related activity could raise inflation temporarily, absent offsetting monetary policy actions," Fed vice chair Philip Jefferson said in a speech earlier this month.
- "I am concerned that there is a dynamic inconsistency problem such that there could be a mismatch between the arrival of costs related to AI investment and the arrival of benefits, including higher productivity that is noninflationary," Fed governor Lisa Cook said in a speech, also this month.
Reality check: Financial markets still price in interest rate cuts this year as more likely than not. The CME FedWatch tool places roughly a 60% chance of at least one rate cut by the June policy meeting, which would be Warsh's first as chair if his Senate confirmation occurs in a timely manner.
- The odds are around 95% of at least one rate cut by the end of the year, little changed from before the minutes were released.
