It was, dare we say, quite a cheery outlook to the end of the trading day.
All three major U.S. stock indices closed at fresh record highs on May 28, the same day inline core PCE inflation data met consensus expectations AND multiple White House sources reported a new, tentative 60-day Iran War cease fire.
Yet investors need to be less optimistic and more mindful that there are still multiple economic narratives coming from private and government data — much of which deflect the likelihood that Federal Reserve Chair Kevin Warsh will be able to convince his fellow policymakers to begin to cut interest rates this year.
Wall Street needs “to brace for multiple hikes of at least 100 basis points or more due’’ to lagging effects of surging energy prices and ensuing supply-chain hikes, according to Joseph LaVorgna, Chief Economist for the Americas at SMBC Americas, told CNBC in a May 28 interview.
LaVorgna, until recently the former senior counselor to Treasury Secretary Scott Bessent, said the future inflation hike is “going to play out a lot like post-Covid” conditions due to the fragility of supply-chain hikes.
LaVorgna served as chief economist of the National Economic Council and special assistant to the president during the first Trump Administration.
The president has been extremely vocal in both administrations in criticizing former Fed Chair Jerome Powell personally and professionally for not lowering interest rates to cut the costs of short-term borrowing and keep the economy from sliding into a recession.
Thus LaVorgna’s forecast is quite a breathtaking pivot from the stance he supported during his days in the Trump Administration.
LaVorgna said he expected Warsh will soon find the U.S. economy in a “small stagflation environment.”
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.
Federal Reserve Bank of New York via FRED®
April FOMC held Fed interest rates steady
The Federal Open Market Committee, in a decisive 8-4 vote on April 29, held the benchmark Federal Funds Rate at 3.50% to 3.75%.
It was the first time in more than 30 years the FOMC vote reflected four dissents.
It was the FOMC’s third pause after cutting rates by 75 basis points during its last three meetings of 2025 to boost a weakening labor market.
Three of those dissents were by regional bank presidents — Cleveland Fed President Beth M. Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie K. Logan — because the post-meeting’s statement did not have language that supported “inclusion of an easing bias in the statement at this time.”
Fed April FOMC minutes show strong hawkish interest-rate shift
But the minutes of the April FOMC meeting, released May 20, showed an even more hawkish shift from policy makers with increasing interest in possible easing due to inflation risks.
- “A majority of participants” highlighted…that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.
- As a result, “many participants indicated” that they would have preferred removing the language from the postmeeting statement that suggested an easing bias regarding the likely direction of the committee’s future interest-rate decisions.
More Fed officials voice concern over possible interest rate hikes
Federal Reserve Governor Lisa Cook, whom Trump is trying to fire, said May 27 that inflation is headed in the wrong direction and she would be prepared to raise interest rates if that persists.
As first reported by Bloomberg, while Cook said she favors holding borrowing rates steady for now she expects price growth to cool again in coming months.
Cook’s comments align with a number of her Fed colleagues who’ve signaled that accelerating inflation is now a bigger policy concern than the labor market.
As I reported, Federal Reserve Governor Christopher J. Waller signaled a major hawkish shift recently and warned that the U.S. central bank may need to raise interest rates due to the increasing inflation risks from the Iran War.
Related: Key Fed official shares strong rate cut warning
The central bank’s current “wait-and-see” approach to holding rates steady is appropriate for now, but Waller said he expects longer term tightening may be necessary for the U.S. economy if supply-shock inflation doesn’t prove transitory.
“I can no longer rule out rate hikes further down the road if inflation does not abate soon,” Waller said in May 22 prepared remarks for a central banking conference in Frankfurt, Germany.
Warsh supported Fed interest-rate cuts earlier this year
The new Fed Chair is one of 12 voting members on the FOMC. It is increasingly apparent policymakers, including those not voting this year, are not going to act any time soon on demands from Trump to slash the funds rate to 1% or lower.
Warsh took on the role as head of the world’s largest central bank promising a “regime change” that included lowering rates, shrinking the $6.7 trillion balance sheet and revising communication strategy to limit issuing forward guidance.
“The Fed is not going to cut the balance sheet. He’s going to move based on how he sees the economy,’’ LaVorgna said, adding that “the longer the stock market is robust, the more likely the Fed” is going to hike interest rates.
LaVorgna said the first hike could come “as soon as September.”
“Warsh will push against’’ the increasing concerns of his FOMC policymakers that inflation risks will prove disruptive to the economy but the fragile “bond market will dictate policy,” LaVorgna said.
U.S. Treasury yields fell May 28, extending a four-day decline. The benchmark 10-year-yield closed to 4.454%, while the long-term 30-year bond eased slightly to 4.99%.
Futures traders are penciling in no cuts for 2026 and two rate hikes in 2027, according to the CME Group FedWatch Tool.
Related: ‘Unhinged’ bond yields reset Fed rate-cut odds
