Kudlow sees Trump-Warsh alignment as Fed dot plot points to 3 hikes

The Fed held rates at 3.50%-3.75% on Wednesday but its dot plot showed nine officials expect at least one hike by year-end, pushing the 10-year/2-year Treasury spread to 28 basis points.

"Trump and Warsh, in different ways, are both promoting really good news," Larry Kudlow, former director of the National Economic Council under President Donald Trump, wrote in a Fox Business commentary Thursday. Kudlow cited Trump's push for tax cuts and deregulation alongside Warsh's commitment to price stability as complementary forces for economic growth.

The S&P 500 fell 1.21% to 7,420.10 on Wednesday, while the Nasdaq Composite dropped 1.34% to 26,021.66 and the Dow Jones Industrial Average lost 0.98% to 51,492.55. The Cboe Volatility Index climbed 2 points to 18.44. Short-term interest-rate futures shifted to price a higher probability of a rate hike as soon as September, according to CME Group's FedWatch tool, a reversal from Tuesday when markets saw roughly 40% odds of rates holding steady through year-end.

The tension between Warsh's hawkish monetary stance and Trump's pro-growth fiscal ambitions will define the policy outlook through 2028. The Fed's median rate projection for 2028 rose to 3.4% from 3.1% in March, suggesting the central bank sees limited room for easing even as the White House pushes for lower taxes and lighter regulation. The next Fed meeting in September will test whether Warsh can deliver on his "new chapter" of data-dependent policymaking without clashing with the administration's growth targets.

The last time the Fed's dot plot showed a comparable hawkish repricing was in December 2024, when the median rate projection for the following year jumped 50 basis points. The S&P 500 fell 3% over the subsequent two weeks before recovering as the labor market softened. This time, the repricing extends further into the future, with rate projections rising across 2026, 2027 and 2028 — a signal that the central bank expects inflation to remain stubborn even as the economy grows.

Kudlow's commentary frames the Trump-Warsh dynamic as mutually reinforcing rather than contradictory. Trump's preliminary peace deal with Iran has driven crude oil prices below $74 a barrel, easing a key inflation input, while Warsh's focus on price stability anchors long-term inflation expectations. Lower energy costs improve consumer purchasing power and reduce input costs for manufacturers, Kudlow argued, creating conditions where both fiscal expansion and monetary restraint can coexist without overheating the economy.

The yield curve's flattening to 28 basis points — the tightest since April 2025 — represents the clearest market signal that investors are pricing in higher-for-longer rates, according to Skanda Amarnath, executive director of EmployAmerica, a policy research organization. The two-year yield, which tracks near-term Fed expectations, has remained elevated even as the 10-year yield reflects steady growth expectations. That configuration historically precedes equity market drawdowns when sustained beyond 30 basis points, though the current 28-basis-point gap leaves little margin for error.

The Fed's updated projections reveal a deeply divided committee. One member projected a rate cut, eight see rates holding steady, three expect one hike, five expect two hikes and one projects three hikes. This split leaves Warsh with limited consensus to lean on as he navigates his first term. In his inaugural press conference, Warsh said he would like financial markets to price securities based on their own reading of economic data rather than trying to anticipate central bank thinking — a departure from the communication strategy of his predecessors.

The combination of a divided Fed, a pro-growth White House and easing geopolitical tensions creates an unusually complex backdrop for policymakers. If inflation continues to moderate as oil prices fall, the case for rate hikes weakens, potentially validating Kudlow's optimistic outlook. But if the labor market remains tight and core inflation stays above the Fed's 2% target, Warsh may need to follow through on the hawkish dot plot, putting him on a collision course with the administration's growth agenda.

This article is for informational purposes only and does not constitute investment advice.