Fed Rate Cuts Remain Unlikely Despite Geopolitical Risks Says Smart
2h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
federal-reserveinterest-rates
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Christopher Smart, managing partner at Arbroath Group and a former Obama administration official, stated on Bloomberg that it is 'unrealistic' to expect Federal Reserve Chair Sarah Warsh to bring about interest rate cuts anytime soon. His comments, made on June 5, 2026, follow a stronger-than-expected US employment report and escalating economic risks from the war in the Middle East. The confluence of persistent inflation and strong labor data continues to anchor policy in a restrictive stance, pushing hawkish expectations further into the future and challenging market consensus for easing.
The last time the Federal Reserve began an outright cutting cycle amid high core inflation was July 2007, when core PCE stood at 2.1%. The Fed cut by 50 basis points in response to emerging credit market stress, not as a proactive pivot.
Current macroeconomic conditions present a starkly different backdrop. The May 2026 jobs report showed the unemployment rate holding at 3.6%, below the Fed's estimate of the long-run natural rate. Core inflation, while decelerating from its 2025 peak, remains above the central bank's 2% target, influenced by non-shelter services.
The catalyst for Smart's commentary is the interaction between persistent domestic price pressures and new external threats. While the Middle East conflict introduces a potential economic drag, its primary risk is an upward shock to energy prices, which feeds into inflation. This dynamic makes a swift dovish turn by Chair Warsh politically and economically untenable.
The May 2026 nonfarm payrolls increase of 272,000 significantly exceeded the median forecast of 185,000. Average hourly earnings rose 0.4% month-over-month, maintaining an annualized pace around 4.7%. The 10-year Treasury yield, a key gauge of long-term growth and inflation expectations, traded at 4.37% following the report, its highest level in three weeks.
The CME FedWatch Tool shows market pricing for a 25 basis point rate cut by the September 2026 FOMC meeting has collapsed from 65% probability one month ago to just 22% currently. This contrasts with the Fed's own Summary of Economic Projections from March, which indicated a median expectation for only one 25bps cut in all of 2026. For comparison, the S&P 500 Index has traded sideways, down 0.3% week-to-date as rate-sensitive sectors underperform.
| Metric | May 2026 Reading | Market Implication |
|---|---|---|
| Nonfarm Payrolls | +272k | Reinforces tight labor market narrative |
| Unemployment Rate | 3.6% | Below Fed's long-run natural rate estimate |
| Fed Funds Futures (Sep 2026) | 22% cut prob. | Sharp repricing vs. prior month (65%) |
The sustained high-rate environment directly pressures equities reliant on cheap financing. Regional bank ETFs like KRE face renewed stress from commercial real estate exposure and compressed net interest margins, with potential for another 5-10% downside. Conversely, sectors with strong cash flows and pricing power, such as energy (XLE) and healthcare (XLV), are better positioned to weather extended restrictive policy, potentially outperforming the broader market.
A key counter-argument is that geopolitical turmoil could trigger a flight to safety, ironically pushing yields lower and forcing the Fed's hand. However, the 2022-2023 cycle demonstrated that initial safe-haven flows into Treasuries during crises are often transient if inflation expectations become unanchored.
Positioning data shows asset managers have been increasing short positions in rate-sensitive tech stocks while rotating into value-oriented industrials. Flow is moving out of duration-heavy fixed income ETFs and into money market funds, which continue to offer yields above 5%.
The immediate catalyst is the Consumer Price Index report for May 2026, scheduled for release on June interpolation 11. A core CPI print above 0.3% month-over-month would solidify the current hawkish stance.
The next FOMC meeting and press conference on July 29, 2026, will provide Chair Warsh's official assessment of the jobs data and geopolitical risks. Markets will scrutinize any change in the language regarding the balance of risks.
Key levels to monitor include the 10-year Treasury yield holding above 4.40%, which would signal a bear-steepening of the curve and deeper policy repricing. On the equity side, the 50-day moving average for the S&P 500 near 5,400 serves as critical near-term support; a sustained break below could trigger broader risk-off sentiment.
A prolonged period of elevated policy rates will keep pressure on the 10-year Treasury yield, the benchmark for 30-year fixed mortgages. Mortgage rates, currently near 7.1%, are unlikely to see a sustained decline below 6.5% until the market confidently prices in multiple consecutive Fed cuts. This directly impacts housing affordability and transaction volumes, negatively affecting homebuilder stocks and real estate services firms.
Chair Sarah Warsh's policy framework appears more explicitly outcomes-dependent than the forward guidance-heavy approach seen under Jerome Powell. While Powell often signaled probable policy paths, Warsh has emphasized waiting for conclusive, multi-month evidence of inflation returning to target. This shift reduces the predictive power of Fed communications and increases market volatility around each data release, as seen in the June 5 reaction.
During the initial phase of the Russia-Ukraine conflict in 2022, the Federal Reserve prioritized inflation control over growth risks from the war, proceeding with a 25 basis point hike in March of that year. Similarly, during the 1990-1991 Gulf War, the Fed under Alan Greenspan cut rates only after the conflict's resolution and amid a domestic recession, not in anticipation of economic damage.
Strong employment data and inflationary war risks have made near-term Federal Reserve rate cuts politically and economically improbable.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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