Disclaimers: The opinions expressed herein are those of the author alone, and do not reflect any position taken by Rochdale. The author strives to remain politically agnostic in economic analysis and forecasting; as such, he is frequently an equal opportunity offender. Forewarned is forearmed.
On January 30, 2026, President Trump announced Kevin Warsh as his nominee for the next Chairman of the Federal Reserve Board of Governors. Warsh, a former member of the Fed, has a solid CV that makes him a strong candidate. He’s not an ivory-tower economist like Yellen, Bernanke, and Greenspan, which counts in his favor with President Trump and with Wall Street.
Before we look ahead to what we might expect from a Warsh Fed – and handicap his confirmation odds – let’s recap the rocky history of the Powell Fed.
Like Warsh, Powell is a banker, not an ivory tower economist, and Powell was also appointed by President Trump, during his first term, though you’d never guess it from their recent skirmishes.
The “Too-Late” moniker that Trump has hung on Powell was in part earned, as Powell was a year late responding to the runaway inflation that plagued the previous administration. As a consequence, the Powell Fed had to embark on the most aggressive round of tightening since the Volcker era, taking the funds target from an upper bound of 25 basis points (bp) in March 2022 – when inflation (CPI) had already jumped from 1.4% to 8.5% since the inauguration – to 5.50% by July 2023, an increase of 525bp in 16 months.
There was no love lost between Powell and Trump even before the 2024 election, as Trump had become a critic by the end of his first term, and remained critical of Powell’s performance under President Biden. But when the Powell Fed committed what is usually the cardinal sin for a central bank of easing within weeks of a hotly contested presidential election, cutting rates by 25 bp in September 2024, the gloves came off.
Trump has been at Powell’s throat ever since. Powell’s response has been to dig in his heels and assert his independence vigorously, but one wonders whether his doing so may be clouding his policy judgment. It would be easy to argue that the Fed has room to ease today, with inflation stable, albeit above its stated target. The recent dissents, which are unprecedented, illustrate just how debatable it is to hold rates where they are.
It’s no surprise that President Trump wants lower rates; every President wants lower rates. Recall President Bush Sr., who infamously said of Chairman Greenspan when he eased more cautiously than Bush would have preferred prior to the 1992 election, which Bush lost, “I re-appointed him, and he disappointed me.”
The Powell Fed constantly claims to be “data-dependent,” so let’s follow the data where it leads. The long-term historical average inflation rate, measured by the Fed’s preferred core PCE deflator, is about 2.6%, going back to 1982. (The reason I went back to 1982 is two-fold. First, that excludes the hyperinflationary period of the mid-70s to early 80s, which would skew the data higher; indeed, if we go all the way back to 1948, the average is 3.2%. Second, 1982 is the beginning of the Monetarist Era, when the Fed began using interest rates, instead of the money supply, to influence economic cycles.)
This begs the question: why does the Fed use an inflation target (2%) that is more than a half-point below the long-term average? They use a range for the Fed funds target; why not use a range for their inflation target – say, a more realistic 2.5-3.0%? If that were the target, the Fed would have eased in January. (The most recent deflator is 2.8%, barely above the long-term average.)
On the flip side of this argument, while President Trump argues for lower interest rates, his tariffs add an estimated 0.7% to the inflation rate. Thus, absent the tariffs, inflation would currently be right at the Fed’s 2.0% target, unreasonably low as it may be, and the Fed would almost certainly be easing today.
Enough about the Powell-Trump spat, let’s turn our attention to the new sheriff in town.
In early trading, the bond market is happy with Warsh; so far, so good. During his previous stint at the central bank, Warsh was an inflation hawk, but he must have softened that stance; without assurances that he favors cutting rates now, President Trump would never have nominated him.
On paper, Warsh is an easy pick who should breeze through confirmation. However, at the beginning of this year, the Trump DOJ launched a criminal investigation against Powell related to his $2.5 billion renovation of the Fed’s headquarters. Was the reno warranted? Maybe. Was it excessive? Undoubtedly. Was it criminal? Absolutely not. The investigation is a thinly-veiled pressure campaign to get the Fed to ease.
Several Republican Senators saw through the veil. (Forget the Democrats; they’d never vote to confirm a Trump nominee anyway.) Sen. Thom Tillis of North Carolina vowed to block any Trump nominee to the Fed, including the Chair, until the investigation is resolved (read: dropped). That may be enough to doom the nomination, so the DOJ will need to back down soon.
As for what to expect from a Warsh Fed once he is confirmed – which is likely – you can all but count on a rate cut at the June FOMC meeting, which would be his first. (There is virtually no chance of a cut at the March meeting.)
And after that? Fed Chairs have a history of growing into the job. Presidents appoint them thinking, “This is my guy (or gal),” expecting that they’ll do their bidding. For this President, those expectations will be high. But once a Fed Chair settles into the realization that he or she is the most powerful person in the global economy, they tend to appreciate the gravity of the role, and the vital importance of maintaining independence, even if it invites the President’s ire. Expect Warsh to be no different.