US inflation hit a nearly three-year high in April, landing a direct challenge on Kevin Warsh just days into his tenure as Federal Reserve (Fed) Chair and sharply narrowing the path to interest rate cuts.
The Commerce Department reported Thursday that the Personal Consumption Expenditures (PCE) price index rose 3.8% year on year in April, up from 3.5% in March and 2.8% in February. Core PCE, which strips out volatile food and energy prices, climbed to 3.3% annually, its strongest reading since November 2023. Both figures now sit well above the Fed’s 2% target.
The Iran war’s sustained shock to oil prices drove much of the increase, with energy costs rippling through consumer spending categories. Americans are already feeling the strain. The personal savings rate dropped to 2.6% in April, its lowest since June 2022, while inflation-adjusted disposable incomes fell 0.5% over the month, according to Commerce Department data.
Treasury yields climbed immediately after the data as investors repriced expectations for monetary policy. The CME FedWatch tool now shows a 98.8% probability that rates remain unchanged at the Fed’s June 17 to 18 meeting, while the odds of a rate hike by December have risen to 40%, up from just 3% at the start of the month. The Fed currently holds its benchmark rate in the range of 3.50% to 3.75%.
Nigel Green, chief executive of global financial advisory firm deVere Group, said the data closes the debate on near-term easing, stating: “The inflation story has turned again and the Fed can’t just ignore it.”
Warsh arrives at the Fed having built his reputation partly by criticising his predecessors for moving too slowly against post-pandemic inflation. That history leaves him little room to ease policy now as prices accelerate again. He has also expressed scepticism about the PCE index itself, favouring trimmed gauges such as the Dallas Fed’s trimmed mean PCE, which strip out extreme price movements including energy shocks. Those trimmed measures currently paint a less alarming picture, though economists warn they could still shift upward if energy prices keep pressuring broader categories.
Fed Governor Lisa Cook this week said she would back further rate increases if inflation fails to cool, a signal that the internal policy debate has turned decisively away from cuts and toward caution.
