Freshly appointed Fed Chair will be eager to start with an interest rate cut—but the central bank is growing more hawkish due to Iran

If Kevin Warsh’s nomination for Fed chair successfully clears Senate hearings—which seems highly probable—he’ll be eager to secure a base rate cut at his first Federal Open Market Committee (FOMC) meeting this summer.

After all, the Oval Office’s directive for the nominee to replace Jerome Powell was clear: The candidate had to be more dovish than Powell. Warsh, a former Fed Governor, meets this requirement—he’s optimistic about the U.S. economy, largely due to the potential of AI, and supports

Trump’s campaign against Powell’s central bank has been fierce; he even took it directly to the Fed’s doorstep. Any incoming Fed chair would want to set an early tone and deliver what the president has been pushing for.

But implementing that cut won’t be easy. Analysts think [missing content] will likely push the already cautious FOMC to adopt a more hawkish position. The main economic consequence of the conflict—aside from the humanitarian cost—is its effect on energy supplies from the Gulf region.

Iran is adjacent to the Strait of Hormuz, a narrow channel in the Persian Gulf that carries exports from the UAE, Qatar, Kuwait, and Iraq. Ship captains are now wary of navigating through it. The White House has proposed providing military escorts for ships in the strait to keep the route open, but it’s unclear if this will actually take place.

Economists’ primary worry is the ripple effect on oil and gas prices. The Fed’s mandate includes maintaining inflation at 2%, and consumer prices are already above this target. Cutting the base rate would worsen inflation by boosting spending and borrowing.

Adding to the problem is the latest jobs report, which indicates the labor market is still strengthening. [missing source] stated that private employers added 66,000 jobs in February, significantly higher than the expected 50,000. This doesn’t support the case for a rate cut. The Fed’s second mandate—stable employment—is already being met with minimal intervention.

Regional Fed Presidents—whose votes carry the same weight as the chair’s—are already saying their wait-and-see approach is more justified due to the conflict. Beth Hammack, president of the Cleveland Fed, noted rates could stay unchanged for “quite some time” because Iran poses a new inflation risk. Similarly, Neel Kashkari, Minneapolis Fed President, mentioned this week he’s less confident in his earlier prediction of a 25-basis-point cut this year: “With the geopolitical events, we need to get a lot more data in.”

Global bank hawks

Central bankers are taking a hawkish approach to the Iran conflict, according to Macquarie’s Thierry Wizman in a client note yesterday. Wizman noted that besides U.S. officials, representatives from the Bank of Japan, Bank of England, Bank of Canada, and European Central Bank have also signaled they’re closely monitoring for any signs of inflation.

“The possibility that the Fed might pause instead of cutting rates this year could explain why the U.S. dollar has gained additional strength (beyond its safe-haven appeal) during the conflict,” Wizman added. “Given that the OIS market last week forecast more than two Fed rate cuts in 2026, the U.S. rate outlook is viewed as having the highest chance of being reversed by another surge in global inflation in 2026 if energy supplies are limited.”

Deutsche Bank’s Jim Reid noted this morning that the strong economic data has led investors to reduce their expectations of a rate cut in the first half of the year: “The probability of a cut by the June meeting—which would be the new chair’s first—dropped to just 39% by the close, the lowest this year. This clearly shows growing doubt that a new chair can start cutting rates immediately, especially given the current strength of the data.”