As the Warsh Fed Convenes, a December Rate Cut Looks Like a Mistake

Six months after the Federal Reserve cut interest rates for a third straight meeting, the data since then suggests the move was a mistake. As the Kevin Warsh Fed prepares for its first policy decision next week, inflation has reaccelerated and job growth has surged — evidence that the central bank overshot in last year's easing campaign, according to Axios.

A contested December cut

The November-December stretch was one of the stranger episodes in modern Fed history, Axios reports. A growing group of officials — mostly reserve bank presidents — pushed back against further cuts, and for a time the December vote looked set to draw the most dissents in decades. Then-chair Jerome Powell instead built a consensus for a reduction, with only two hawkish dissents: the Kansas City Fed's Jeff Schmid and the Chicago Fed's Austan Goolsbee. The committee majority judged the job market the more urgent risk and expected inflation to fall back to the 2% target once one-time tariff effects passed through.

Inflation moving the wrong way

That bet has not held up. Core PCE inflation, excluding food and energy, was tracking at 2.8% year over year at the time of the December decision, and the median Fed official expected it to ease to 2.5% in 2026. Instead, through the first four months of this year, core PCE has reaccelerated to a 4.1% annual rate. Overall PCE inflation, lifted by the energy price surge tied to the Iran war, is running at an even faster 5.5% annual rate over the same period.

A labor market that didn't need help

The job market, the focus of last year's worry, has been more resilient than expected. The unemployment rate has held steady at 4.3% for three months, and job creation has reaccelerated to an average of 114,000 per month so far this year — up sharply from 2025, when hiring flatlined at roughly 10,000 per month. Whatever the mix of labor supply and demand behind that swing, Axios notes, the outcomes are hard to square with a labor market in urgent need of monetary stimulus.

Officials shift their tone

Governor Christopher Waller, who six months ago backed the December cut as "additional insurance against an acceleration in the weakening of the labor market," now points elsewhere. "Fortunately, the labor market seems to have stabilized in recent months," he said last month, adding that "inflation, on the other hand, will be the driving force." Waller advocated holding rates steady for now but said he "would not hesitate" to raise them if inflation expectations became unanchored.

The bottom line

Markets are now pricing meaningful odds that the Fed will have to reverse course and raise rates this year. The lagged, uncertain nature of policy makes it impossible to pin the overshoot directly on excessive cutting, but the result is a strong chance the dials are now mistuned — adding stimulus when conditions call for a more neutral stance. As Warsh sets the course forward, he inherits a rates policy that may be ill-suited to the moment.