US Fed faces a reformist challenge as the baton passes from Powell to Warsh

Kevin Warsh will now lead the world’s most influential central bank, the United States Federal Reserve. At the beginning of the year, this column argued that threats to the Fed’s independence would be among the biggest issues to watch, and the change in leadership is an important aspect in this regard. This is vital because the US has the biggest and most liquid financial market in the world, and the US dollar is the world’s most important currency. Even signs of systemic stress in the US markets can potentially destabilise the entire global financial system. The outgoing Fed Chair, Jerome Powell, faced frequent attacks from President Donald Trump. In Mr Trump’s view, interest rates need to be brought down substantially — something Mr Powell and his colleagues did not deliver for sound economic reasons.

 

Besides the verbal attack, the administration’s Department of Justice (DoJ) initiated an investigation against Mr Powell, which was seen as a direct attack on the central bank’s independence. The DoJ had to drop the investigation because some senators made it a condition for confirming Mr Warsh. Mr Trump also attempted to fire one of the Fed’s governors. This is the broader context in which the leadership change is happening.

 

Mr Warsh is not new to the Fed. In 2006, he became the youngest-ever member of the Board of Governors of the Federal Reserve System. He quit in 2011, and much has changed since then. He is said to have lost the race for the Fed’s top job to Mr Powell eight years ago, and some commentators argue that he has since shifted his positions to qualify for the role. How Mr Trump reacts to his decisions will soon be known. The US inflation rate stood at 3.8 per cent in April, nearly double the medium-term target of 2 per cent. With sustained uncertainty in West Asia, inflation is likely to remain elevated. It will be interesting to see how the new Fed Chair approaches the situation, given that inflation has remained above target for about five years.

 

To better understand Mr Warsh’s position on various issues, his speeches, writings, and statements before the Senate Banking Committee are being analysed. Responding to concerns about pressure from Mr Trump, he told the Senate Committee that the President had never asked him to commit to any interest rate decision and that he would not agree to do so. He also noted that elected officials stating their views on interest rates does not, in itself, affect monetary policy independence, and that the Fed’s independence is up to the Fed. However, he would not be facing a usual elected official. Mr Trump is a disruptor with little regard for conventional economic thinking. Thus, how he reacts to the Fed’s decisions in a relatively high-inflation environment, which is partly his own creation, will be worth watching.

 

While Mr Warsh has often spoken and written about the Fed over the years, his November 2025 article in The Wall Street Journal provides a quick glimpse into his views. He noted, “...inflation is a choice, and the Fed’s track record under Chairman Jerome Powell is one of unwise choices.” He further argued that inflation is caused by the government spending too much and printing too much. And that the Fed’s balance sheet can be reduced substantially. Notably, Mr Warsh studied under the legendary economist and Nobel Laureate Milton Friedman. But implementing these ideas may not be easy.

 

Inflation in the US surged after the pandemic because of a range of factors, including supply chain disruptions, loose fiscal policy, and excessive monetary accommodation. With the benefit of hindsight, it can be argued that policy interventions could have been more restrained. One of the biggest challenges of Mr Powell’s term was to bring down the inflation rate, which went over 9 per cent. However, to the Fed’s credit, interest rates were adjusted quickly, and the disinflation process was nearing completion without triggering a recession, before Mr Trump’s tariffs and the Iran war complicated the situation.

 

Now, odds favour a rate hike. Although Mr Warsh has argued that artificial intelligence will be a significant deflationary force and productivity booster, other members of the Federal Open Market Committee would likely approach the situation more conventionally. Further, while the Fed is reducing its balance sheet, a faster reduction could push up market interest rates, something Mr Trump will not like, and could prove disruptive under current conditions.

 

In addition, Mr Warsh will have to steer monetary policy in an environment of higher government spending. According to International Monetary Fund projections, US general government debt is projected to rise from the present level of about 125 per cent of gross domestic product to 142 per cent by 2031. Rising debt and higher budget deficits will likely keep borrowing costs elevated and could become a source of friction between the Fed and the government. How Mr Warsh manages this will be closely watched.

 

Notably, Mr Warsh is also in favour of reducing Fed communication. He has argued that policymakers can become prisoners of their own words. Central bank communication has evolved into an important tool, particularly since the global financial crisis, and has helped financial markets adjust to evolving conditions. It also often helps central banks achieve outcomes without actually pulling policy levers. Mr Warsh wants to significantly reform the way the Fed functions, but his real challenge may be outside the central bank.