Before people arrive, the road is already difficult! Jerome Powell's path to cutting interest rates at the Federal Reserve encounters multiple headwinds - colleagues questioning, data diverging, and balance sheet reduction being blocked.

Distance Kevin Wash from formally taking charge of the Federal Reserve is still several months away, but his ability to fulfill President Trump's promise to cut interest rates is facing many obstacles - the reality of the US economy and the policy trends of his future colleagues at the Federal Reserve are pointing in the opposite direction. Given that inflation is still high and the labor market seems to have stabilized, most Federal Reserve officials believe there is no urgent need for further interest rate cuts. The resurgence of conflict in the Middle East has caused the largest surge in oil prices in four years, which will only make them more hesitant. Several policy makers also expressed doubts about the core logic supporting Wash's vision of cutting interest rates. This vision is based on two major promises: one is that technological revolution will bring economic prosperity with low inflation, and the other is that he will reduce the Federal Reserve's balance sheet. All of this is happening before Wash has been officially nominated, and it is happening against the backdrop of opposition from Republicans in the Senate confirmation process - the latter is dissatisfied due to the Department of Justice's investigation into current Federal Reserve Chairman Jerome Powell (whose term ends in May). Even if the above obstacles are cleared, current dynamics suggest that if Wash pushes for immediate and substantial interest rate cuts, he may face strong resistance, potentially creating a potential flashpoint with the White House. This also means that Wash may find it difficult to fulfill a key part of his role as Federal Reserve Chairman: presenting a compelling economic argument to garner support from colleagues and build consensus. "If Chairman Wash wants to implement a series of interest rate cuts - like cutting rates four times in the second half of the year - unless the data surprises, I don't think he will get enough votes," said William English, a professor at the Yale School of Management and former Federal Reserve official. "The prospects do not support such a policy." "Seeing is Believing Phase" After three consecutive interest rate cuts at the end of 2025, Federal Reserve policymakers maintained the interest rates in January, citing improvements in the labor market and ongoing concerns about inflation - inflation at the end of last year was still nearly one percentage point above the 2% target. Boosted by the better-than-expected January employment report, most policymakers acknowledged the view that the labor market is stabilizing. Cleveland Federal Reserve President Beth Hamak (who has voting rights this year) and a few other officials expressed the expectation that rates would remain unchanged "for a period." Even Governor Kristopher Welle, who called for a 25 basis point rate cut in January, has admitted that improvements in the labor market may mean that the meeting on March 17-18 should stay put. The minutes of the January meeting showed that some officials even consider the possibility that if inflation continues to exceed targets, the Federal Reserve may need to raise rates. Claudia Sam, Chief Economist at the New Century Advisory Company and former Federal Reserve economist, said that later this year, the Federal Reserve may still see a slowdown in inflation and stability in the labor market, providing "good news-style" interest rate cuts during Wash's tenure. However, she added that, at present, officials are in the "seeing is believing phase," waiting for further progress on inflation. AI skepticism Despite most of the data not supporting interest rate cuts, Wash still implied that the greater structural changes in the US economy could provide reasons for cutting interest rates. He compared the flourishing development of artificial intelligence with the internet boom of the 1990s, when productivity soared, helping to suppress inflation and interest rates for a time. Productivity is crucial because labor costs are the biggest expense for many businesses. When companies can use technology and equipment to increase output, they can drive economic growth without causing wage-driven inflation. "AI will be an important anti-inflationary force, increasing productivity and enhancing US competitiveness," Wash pointed out in a viewpoint article in November last year. Recently, labor productivity has indeed surged significantly. Over the past 50 years, the quarterly annualized growth rate of output per hour for non-farm employees has averaged 1.9%. In the past 10 quarters, this average reached 2.7%, touching 4.9% in the third quarter of 2025. But in the weeks following Trump's announcement of Wash as the Federal Reserve nominee, several Federal Reserve officials have made it clear that they still do not believe the current economy is experiencing conditions similar to the 1990s - when then-Chairman Alan Greenspan was able to keep the economy running hot. The logic of skeptics is as follows: It is too early to assert that AI is driving current productivity growth; even if this is the case, the massive scale of AI investment may mean that interest rates need to remain at a higher level, at least in the short term. Other possible explanations for the surge in productivity include investments in other labor-saving technologies and a boom in new business startups. "I don't think I'm the only one who thinks this, but in the past year or two, the productivity growth we've seen didn't come from AI," said Wall, who was a popular candidate for Federal Reserve Chairman before Wash's selection, in a panel discussion on February 23. "I don't think any of us believe [that] was the main DRIVE." Other Federal Reserve officials, including Governors Michael Bar and Lisa Cook, as well as Vice Chairman Phillip Jefferson, have also expressed similar doubts. Balance sheet resistance Another pillar of Wash's outlook - reducing the Federal Reserve's $6.6 trillion balance sheet to create room for interest rate cuts - has also not received support from decision-makers or Wall Street. The size of the Federal Reserve's securities holdings has expanded, in part because officials judged that more stimulus measures were needed during the global financial crisis (when benchmark rates hit zero) and during the pandemic. "The Federal Reserve's balance sheet, which has expanded to support large companies since the time of the crisis, can be significantly reduced," Wash pointed out in his article in November last year. "This large sum can be redeployed in the form of lower interest rates to support households and small businesses." But despite receiving support from Treasury Secretary Scott Bennett, analysts warned that the process is risky and time-consuming. Simply letting securities mature naturally could lead to a liquidity shortage, causing severe volatility in the short-term funding market, as happened in 2019. Analysts said the Federal Reserve could relax rules requiring banks to hold large cash reserves at the central bank, or shorten the average maturity of the Treasury securities it holds, but added that these measures cannot be completed quickly and have limited effectiveness. Another more radical step is to return to the pre-financial crisis approach of controlling interest rates at the Federal Reserve - this system would keep bank reserves at absolute minimum levels but lead to greater fluctuations in benchmark rates. To calm the markets, Bennett said he expects the Federal Reserve to proceed cautiously. "I don't expect them to take any action quickly," he said in a news interview on February 8. "They have moved to the ample reserves system, which does require a bigger balance sheet, so I think they are likely to delay action, at least spend a year deciding what they want to do." A sign of future debate is that Wall was more blunt in rejecting a return to the "scarce" reserve system. "You can't expect banks to be flipping through couch cushions every night looking for money," he said earlier this month. "It's extremely inefficient and foolish."