Will Warsh Pander to Trump with First Cut? The New Fed Chair’s Inflation Dilemma
Outgoing Fed Chair Jerome Powell may well have presided over the last interest rate cut of his career given the recent run of data. And Kevin Warsh, his would-be replacement, may find himself waiting uncomfortably long—right up close to the midterm—to start the policy easing that President Donald Trump expects from his hand-picked new chair.
A report on Friday showed that the Fed’s preferred measure of underlying inflation—the core personal consumption expenditures price index—rose 0.4% in December, the most since last February. On a year-over-year basis, the measure rose 3%, a full percentage point above the Fed’s 2% target. It’s on track to hover around those levels of inflation in the forthcoming January release.
This is not the economic picture that Trump envisioned when he selected Warsh to replace Powell. The president’s entire rationale for a new Fed chair was to lower policy rates. And Warsh ultimately got the job by shedding his reputation as a monetary policy hawk and portraying himself as someone who shared Trump’s outlook.
The Inflation Challenge
Bear in mind, companies have tended in recent years to use the entire first quarter to push through catch-up price hikes, which could keep upward pressure on the February and March reports as well. Come the April report, a quirk in the data is expected to resolve with a jump in housing inflation, which will happen in a release that’s published in May, the month of the leadership change.
In other words, reported inflation is likely to remain warm through the end of Powell’s tenure. And Warsh, for his part, may begin his new role, if he’s confirmed by the Senate, with a streak of zero encouraging inflation reports with which to convince his Fed colleagues of the need to lower rates. Good luck with that!
It’s not that inflation is getting materially worse, of course, but it’s not getting discernibly better either. Disinflation is stalling out at a time when economic growth is still strong and the labour market resilient.
The Economic Backdrop
While growth in gross domestic product could be at a 1.4% annualised pace in the fourth quarter, the slowdown was largely a function of the record-long government shutdown that unfolded over the first 43 days of the period. Final sales to domestic purchasers—a measure often referred to as “core GDP”—expanded at a not-too-shabby 2.4% pace.
Meanwhile, the unemployment rate has declined in the past two monthly reports, and a decline in initial jobless claims has added to evidence that the labour market is stabilising. This is not an economy crying out for stimulus. This is an economy that is growing at a reasonable pace, with low unemployment and inflation running above target.
The Fed’s Evolving Stance
Even before the latest round of data, monetary policymakers at the Fed’s January 27-28 meeting were already starting to subtly shift their assessment of the balance of risks between inflation and the labour market. Here’s the key section of the Federal Reserve’s statement:
Some participants commented that it would likely be appropriate to hold the policy rate steady for some time as the Committee carefully assesses incoming data, and a number of these participants judged that additional policy easing may not be warranted until there was clear indication that the progress of disinflation was firmly back on track. Several participants indicated that they would have supported a two-sided description of the Committee’s future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.
This language is significant. It signals that the Fed is not just pausing rate cuts; it is actively considering the possibility of rate hikes if inflation persists. For a new chair who was chosen specifically to lower rates, this could not be a worse backdrop.
The Labour Market Nuance
The circumstances can always change, of course. In the labour market, hiring remains notably weak, and those who lose their jobs are struggling for months to find new ones, as are many young people looking to start their careers. Even still, it would be hard for policymakers to make the case that the economy needs more of the Fed’s medicine, based on what we know now.
The labour market presents a mixed picture. Unemployment is low, but hiring is weak. Jobless claims are down, but the long-term unemployed are struggling. Young people face barriers to entry. These are structural issues that monetary policy cannot easily address.
Warsh’s Dilemma
All of this makes for an extremely awkward start to the “Kevin Warsh Fed.” President Trump’s entire reason for picking a new Fed chair was to lower policy rates. And Warsh ultimately got the job by shedding his reputation as a monetary policy hawk and portraying himself as someone who shared Trump’s outlook.
But at the end of the day, policy is set by a committee that includes 11 other voters whom Warsh will have to persuade with the evidence at hand. And it’s become harder and harder to see how he’ll swiftly deliver the rate cuts that the president craves.
Knowing Trump’s penchant for attacking those who disappoint him, that could make for a chaotic period for the new Fed leader. The president has already demonstrated his willingness to publicly criticize Fed chairs who don’t deliver the policy he wants. Warsh may find himself in the crosshairs sooner rather than later.
The Institutional Question
This situation raises broader questions about the independence of the Federal Reserve. The central bank is designed to be insulated from political pressure, making monetary policy decisions based on economic data rather than presidential preferences. A chair who is seen as pandering to the president risks undermining that independence.
Warsh faces a delicate balancing act. He must maintain credibility with his colleagues on the Federal Open Market Committee, who are watching to see whether he will prioritize the president’s preferences or the economic data. At the same time, he must manage a president who expects results and is not known for patience.
Conclusion: A Chaotic Start?
The stars could not be less aligned for a new Fed chair hoping to deliver rate cuts. Inflation remains above target, growth is reasonable, and the labour market is resilient. The data simply does not support easing.
Warsh may find himself in the uncomfortable position of explaining to the president why rates cannot be cut, even as Trump demands action. That conversation, if it happens, could set the tone for the entire tenure. A chaotic start to the “Kevin Warsh Fed” seems increasingly likely.
Q&A: Unpacking the Fed Chair Dilemma
Q1: Why is Kevin Warsh’s expected appointment as Fed chair awkward for him?
Warsh was chosen by President Trump specifically to lower policy rates, shedding his hawkish reputation to align with Trump’s outlook. However, recent inflation data shows core PCE at 3%, a full point above target, with no clear disinflation trend. The Fed’s latest statement even raised the possibility of rate hikes if inflation persists, making it extremely difficult for Warsh to deliver the rate cuts Trump expects.
Q2: What does the latest inflation data show?
The core personal consumption expenditures price index rose 0.4% in December, the most since last February. On a year-over-year basis, it rose 3%, a full percentage point above the Fed’s 2% target. Companies often push through catch-up price hikes in the first quarter, potentially keeping upward pressure on February and March reports. Housing inflation is also expected to jump in upcoming releases.
Q3: How is the Fed’s stance on rates evolving?
At the January 27-28 meeting, Fed officials shifted their assessment. Some indicated it would be appropriate to hold rates steady for some time, with additional easing not warranted until clear disinflation progress. Several supported a “two-sided” description of future decisions, acknowledging that rate hikes could be appropriate if inflation remains above target. This is a significant hawkish tilt.
Q4: What is the broader economic context?
GDP growth slowed to 1.4% annualised in Q4, largely due to a record-long government shutdown. But “core GDP” (final sales to domestic purchasers) expanded at 2.4%. The unemployment rate has declined, and jobless claims are down, suggesting labour market stabilisation. While hiring remains notably weak, the overall picture is not one of an economy needing stimulus.
Q5: What risks does Warsh face in his new role?
Warsh must persuade 11 other FOMC voters to support rate cuts based on evidence, but current data points away from easing. If he cannot deliver the cuts Trump wants, he risks presidential attacks—Trump has a history of publicly criticizing Fed chairs who disappoint him. This could create a chaotic start for the new Fed leader and raise questions about central bank independence.
