Key Points
Investors love low interest rates. When rates are low, companies can borrow money more cheaply to fund their expansion plans. Lower interest expenses help boost earnings. As earnings go, so do stock prices.
Presidents love low interest rates, too. The economy booms in low-rate environments. When the economy is strong, the president’s political party tends to perform well in elections.
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It’s unsurprising, therefore, that President Trump wants the Federal Reserve to cut interest rates. And there’s good reason to believe that he expects new Fed Chair Kevin Warsh to deliver what he wants. However, the reality is that Warsh could soon be on a collision course with Trump.
Image source: Official White House Photo by Daniel Torok.
The scenario that no one wants
Warsh is unlikely to be able to deliver the rate cuts President Trump desires. Even worse, the Fed could be forced to increase rates in the not-too-distant future. This is the scenario no one wants — certainly not Warsh — but it could be unavoidable.
The Federal Reserve has a dual mandate. Its two priorities are to maximize employment and achieve price stability. The first goal isn’t an issue for now. However, prices aren’t stable. The latest Consumer Price Index (CPI) was 3.8%, significantly above the Fed’s historical 2% target.
This situation could get worse as the Iran war drags on. In fact, professional economic forecasters expect the CPI to hit 6% in the second quarter of 2026, according to a survey conducted by the Federal Reserve Bank of Philadelphia.
The Fed has two primary levers to control inflation. It can increase the federal funds rate that banks charge each other for overnight loans. It can also sell U.S. Treasury bonds to drain cash from the economy. Both actions help drive interest rates higher. Higher rates slow the economy and curb inflation.
CME Group‘s (NASDAQ: CME) FedWatch analyzes 30-day Fed fund futures prices to estimate the probabilities of Fed rate cuts and increases. The highest probability for a rate cut for any scheduled Federal Open Markets Committee (FOMC) meeting throughout the rest of 2026 is 3.6%. But the probability of a rate increase by the end of the year is as high as 50.9%. The chances jump to 72% by mid-2027.
The bond market is also already pricing in a likely rate increase. Interest rates on 10-year U.S. Treasury notes have jumped in recent months.
Collision course
President Trump repeatedly lambasted Warsh’s predecessor, Jerome Powell, for not moving quickly to cut interest rates. He told Fox News in April 2026, “I’ve wanted to fire him, but I hate to be controversial.” The U.S. Department of Justice also launched a criminal investigation of Powell related to the renovation of the Federal Reserve building, which was later halted.
Does Trump expect Warsh to cut rates? The president stated at Warsh’s swearing-in ceremony, “I want Kevin to be totally independent.” However, only hours after Warsh was sworn in as the new Fed chair, Trump told an audience at a community college in New York, “You watch what’s going to happen. I had a rotten head of the Fed, and now I have a great head of the Fed.” He added, “You get the interest rates down, everybody’s going to be very, very happy.”
If the next FOMC meeting on June 16 and 17 doesn’t result in rate cuts, it won’t be surprising if President Trump lashes out — especially if Warsh doesn’t vote in favor of lower rates. But the real fireworks could come if Warsh concludes that rate hikes are necessary to keep inflation in check.
Warsh only has one vote. There are 11 other FOMC members. He could vote for rate cuts to avoid alienating the president, knowing that there would be enough votes to move in a different direction. Doing so, though, would likely draw intense criticism that he is compromising the Fed’s political independence. Warsh could be forced to choose between placating his political patron and preserving his (and the Fed’s) reputation.
What should investors do?
Investors shouldn’t panic just because the possibility of a rate increase is increasing. The stock market has survived past rate hikes; it will do so again.
However, some stocks perform better than others in higher-rate environments. Investors should focus on companies with strong balance sheets. Big bank stocks often benefit from higher interest rates. Value stocks could also become more attractive to many investors. If oil prices remain elevated, energy stocks could continue outperforming.
Betting that Warsh will engineer a rate cut, though, probably isn’t smart. If inflation keeps rising, the new Fed chair won’t have to choose between what the president wants and what the right course of action is. The data will make the choice for him.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
