Trump's new Fed chair could send him into a rage

09 June

Kevin Warsh, President Donald Trump's nominee to be the next chair of the Federal Reserve, attends a Senate Banking Committee confirmation hearing on Capitol Hill in Washington, D.C., April 21, 2026. REUTERS/Kevin Lamarque

One point of contention between President Donald Trump and Federal Reserve Chairman Jerome Powell was Powell's refusal to follow Trump's demands to lower interest rates. Now, Trump's replacement will be forced to tell him he will likely follow the same path.

The Economist reported on Tuesday that unlucky chairman Kevin Warsh "has seen his case for lower interest rates disintegrate." The report called it "ironic" that Warsh's life is going to be miserable as Trump demands lower rates, even as annual inflation has risen to its highest level since 2023 (3.8 percent)

Over most of his career, Warsh has been an "inflation hawk," but in the last several years, he's advocated the same policy as Trump.

"Warsh’s out-of-character doveishness provoked wry smiles but not scorn from other central bankers, most of whom were glad that Mr Trump had picked someone sane for the job," said The Economist. "Alas, the happy coincidence is over. The case for lower interest rates has crumbled. Mr Trump still wants rate cuts but, if anything, today’s economic conditions demand tighter money."

Since Warsh became the Fed chair, the U.S. job market has gotten stronger. Many factors, such as a low unemployment rate and low immigration, make the economy appear as if it is doing well. After all, the stock markets are riding on the highest levels ever. The Economist described it as a kind of sugar rush from tax cuts and artificial intelligence (AI) companies.

The problem, however, is that those are now impacts that everyday Americans are dealing with. Most people are facing soaring gas prices, higher inflation, and stagnating wages that aren't keeping up with the higher costs. The Federal Reserve prefers a 2 percent inflation rate. The U.S. hasn't had that since the pandemic.

"Overshoots could get baked into the public’s expectations. Inflation that started with oil could take on a life of its own," the report said. "The novel arguments Warsh has advanced for lower interest rates look shakier than ever. While vying for Trump’s nomination, he claimed that he had ditched his career-long hawkishness because of advances in AI. The technology would soon unleash such abundance, he argued, that inflation would be vanquished, leaving the Fed plenty of space to cut interest rates."

Nearly the reverse has happened.

The data center boom and stock market high have invigorated consumption, the report said. With it, likely inflation.

Warsh's other idea is to sell off its bond holdings, which would tighten monetary policy through the balance sheet. He thinks it would ultimately let them lower interest rates at the same time. The Economist described it as trying to keep a room comfortable by running both the heat and air conditioning at the same time.

The Economist thinks that the impact would be small. A Warsh ally, former Fed governor Stephen Miran, implied that shrinking the balance sheet by about 5 percent of GDP. But experts say it would raise long-term bond yields by about the same amount as just a 0.25 percent interest rate increase and that's probably too high.

Bond buying also signals where interest rates are headed. For example, after the 2007–09 financial crisis, it showed that rates wouldn’t rise for a long time. But with Warsh’s plan, the balance sheet and interest rates would move in opposite directions. So, in the end, it may not help interest rates long-term because it would signal that the rates were about to drop.

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