Fed and Warsh under increasing pressure to keep rates higher, thanks to labor market strength

The Federal Reserve is under more pressure to hold interest rates steady, or even raise rates, given recent indications that the labor market is strong.

The Fed last cut rates in 2025 and, given the recent uptick in inflation, appears unlikely to revise them down again this year. And while inflation has been trending up, the labor market appears quite stable. That means that new Fed Chairman Kevin Warsh and the Fed board can focus more on curbing inflation than on worrying about unemployment rising.

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“Their primary concern is no longer the health of the job market,” Mark Hamrick, a senior economic analyst at Bankrate, told the Washington Examiner.

The latest news that the labor market is remaining resilient came this week in the form of the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey.

The April JOLTS report showed that job openings increased from 6.9 million in March to 7.6 million in April, the highest level since May 2024. The reading was much higher than anticipated. Most economists were expecting job openings to remain static, not rise by 731,000.

“This report tells us that openings remain ample in a time of full employment,” Carl Weinberg, chief economist for High Frequency Economics, wrote in a note on the report. “That suggests that labor availability is throttling employment.”

Also, recent employment reports have shown the labor market has remained stable.

The Bureau of Labor Statistics reported that 115,000 jobs were added in April, well above what forecasters were expecting. The unemployment rate also held steady at a relatively low 4.3%.

The Fed has what is referred to as a dual mandate, price stability and maximum employment. When inflation is rising, the major tool it has to fix that is to raise interest rates. In general, Fed officials hope that higher rates will lead to less borrowing and spending, thereby lowering inflationary pressures.

The problem is that when the Fed keeps rates high or raises rates, it risks hurting the job market, which is why the labor market’s relative strength right now is such an asset for Warsh and the central bank.

Ryan Young, senior economist at the Competitive Enterprise Institute, told the Washington Examiner that right now, the Fed would rather focus on the price stability side of its dual mandate.

“Since they contradict each other, they really have to prioritize one or the other, because you can’t have both,” Young said. “So, right now, it seems like they’re in the price control side of things, and the fact that the labor market is holding steady is fantastic news for that.”

And the inflation numbers have been a bit concerning.

Inflation tracked by the most closely watched consumer price index ticked up to 3.8% in April.

Inflation in the personal consumption expenditures price index, the Fed’s preferred gauge, rose to 3.8% in April, well above the Fed’s 2% target and much higher than just a few months ago before the war with Iran sent energy prices spiking.

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CPI inflation had dropped to as low as 2.4% in January before the war began, meaning that headline inflation has trended up more than a full percentage point.

And investors are signaling they think there is a very low likelihood of a rate cut this year.

As of Thursday, the implied odds of a rate cut by the end of the year are just under 2%, according to CME Group’s FedWatch tool, which calculates the probability of rate changes using futures contract prices for rates in the short-term market targeted by the Fed.

Meanwhile, investors are pegging the odds that rates remain static by year’s end at just over 48% and the odds of a rate increase at just under 50%, with some investors betting on two rate increases.

And with the conflict in the Middle East still not resolved, inflation could have some more room to run.

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Another inflation gauge, the producer price index, showed wholesale inflation shot up to a blistering 6%, the biggest increase since 2022. It increased an astonishing 1.4% in April alone.

“You know, there’s already enough in the pipeline where we saw that surge in the PPI to indicate that there are going to be some price increases still to come on the consumer side,” Hamrick said.