WASHINGTON, March 3, 2026, 09:07 (EST)
- Energy prices pushed higher with the Middle East conflict escalating, prompting traders to pare back bets on imminent Fed rate cuts.
- Kevin Warsh is already running into pushback on his capacity to deliver the rate cuts Trump is after, Bloomberg reported, and he hasn’t even stepped into the job yet.
- The Financial Times says Warsh is looking to reduce the Fed’s bond holdings, though any change would probably happen gradually.
Oil climbed again Tuesday, driven by escalating tensions between the U.S., Israel, and Iran. That uptick chipped away at expectations for U.S. interest-rate cuts, a shift that adds another hurdle for Fed chair nominee Kevin Warsh.
The timing’s tricky for both the central bank and the White House. President Donald Trump wants Warsh to take over from Jerome Powell as chair when Powell’s term wraps up in May. Trump’s also been calling for cheaper borrowing.
Here’s the crux right now: the Fed’s figuring out if inflation is actually heading for that 2% target, but a spike in energy prices can muddle the whole view in a hurry. Warsh, meanwhile, wants to shake up the Fed’s playbook—he’s arguing for a trimmed-down balance sheet, a move that could easily jolt money markets if it misfires.
Odds for a June rate cut from the Fed have fallen back, with the CME FedWatch tool now showing just a 30.7% probability for at least a quarter-point move—down sharply from 49.6% a week earlier. Pricing in the futures market points to July as the new focus, with traders factoring in around 42 basis points of cuts by December. That’s basically one 25-basis-point reduction, leaving the possibility of a second cut uncertain. Goldman Sachs, in a note Monday, estimated that if oil prices stay 10% higher, core CPI would climb by roughly 4 basis points, while headline CPI could jump 28 basis points.
According to Bloomberg, Warsh is already facing pushback from officials reluctant to move quickly on the rate cuts Trump wants, given still-high inflation and a labor market that’s finding its footing. The report also highlights oil’s biggest jump in four years as yet another complication for policymakers mulling whether to keep rates steady.
Warsh is pushing for a broader shift in the Fed’s longer-term stance. According to the Financial Times, he’s looking to see the central bank slowly unwind its nearly $7 trillion balance sheet—Treasury and mortgage bonds accumulated over years of quantitative easing, a policy the Fed turned to when rates stayed low.
Pace counts, and so does plumbing. Right now, the Fed manages short-term rates mostly by paying interest on the reserves that banks leave at the central bank—no longer by having banks lend reserves among themselves each day. According to the FT report, critics such as Fed Governor Christopher Waller have cautioned that shrinking the balance sheet too aggressively could rattle money markets.
Oil wasn’t even in focus yet when investors started dialing back expectations for rapid Warsh-era rate cuts, according to a Reuters report from last week. With growth looking sturdier, Natixis economists Christopher Hodge and Selin Aker noted the Fed’s reaction function has turned “slightly more hawkish.” https://www.reuters.com/business/odds-earl…
But the path forward is anything but direct. “The tail risks have certainly increased,” said Christopher Hodge, chief U.S. economist at Natixis CIB Americas, describing outcomes ranging from a rapid de-escalation that could let oil prices retreat, to a wider crisis that might push crude past $120 a barrel and leave the Fed slashing rates to soften a downturn. “This nascent recovery is now at risk,” JPMorgan economist Joseph Lupton warned. Over at SGH Macro Advisors, Tim Duy labeled the Iran conflict a “wild card” for policy. https://www.reuters.com/world/middle-east/…
The Fed looks set to keep rates unchanged at its March meeting, pausing after three cuts in 2025. Warsh doesn’t step in for months yet, and oil’s climb is forcing inflation back into focus. Markets are now building in a longer wait before another cut comes through.
