Kevin Warsh takes over US Fed with a policy problem already in view

The new Federal Reserve chair takes charge as rising inflation, AI-led economic shifts and geopolitical shocks complicate the US monetary policy outlook

Kevin Warsh, whose criticism of current US Federal Reserve officials, approach to rate cuts and ties to President Donald Trump elevated him above other contenders to lead the central bank, was sworn in as Fed chair on Friday at a pivotal moment for monetary policy and the American economy.

 

An unfolding boom in AI technology is reshaping the economy in ways Fed officials say could prove profound for workers, companies and consumers, but will be difficult for Warsh and his colleagues to assess in real time.

 

At the same time, inflation remains high and could rise further as the economy copes with shocks including oil prices driven above $100 a barrel by the US-Israel-Iran conflict, elevated import tariffs, and utility and other costs rising because of the AI rollout.

 

 

WALLER: DROP ‘EASING BIAS’

 

The policy debate is already intensifying, with Fed Governor Christopher Waller, a Trump appointee who was interviewed for the role ultimately won by Warsh, making a significant shift in his own stance on Friday. Waller agreed with a group of recent Fed dissenters that the central bank should drop the “easing bias” from its policy outlook and open the door to a possible rate hike.

 

With recent data showing inflation broadening and intensifying across the economy, the Fed should “make it clear that a rate cut is no more likely in the future than a rate increase,” Waller said shortly before Warsh was sworn in. The comments added to market sentiment already leaning towards tighter monetary policy and a potential rate increase this year.

 

Warsh, 56, secured Trump’s backing for the role after a year-long public contest among leading candidates.

 

During that period, the new chair laid out ambitious reform goals for a central bank he argued had begun to lose its way by the time he resigned as a governor in 2011 in opposition to Fed bond-buying. However, his initial months may now be dominated by the immediate dilemma of whether to raise interest rates to prevent inflation from moving further above the Fed’s 2 per cent target, or risk undermining his credibility as an inflation fighter from the outset.

 

“Inflation is the Fed’s choice,” Warsh said during a Senate confirmation hearing, referring to the central bank’s control over short-term interest rates as a tool to encourage or restrain spending and thereby steer inflation towards target. The Fed has missed its target for more than five years and inflation currently remains more than one percentage point above it.

 

HARD CHOICES

 

Bringing inflation down can involve difficult trade-offs that may conflict with the policies and objectives of the Trump administration, and at times with the Fed’s other mandate of maximising employment. Warsh will begin his tenure as the Fed’s 11th chair under pressure from multiple fronts — a global bond market that has begun driving up interest rates amid mounting inflation concerns, colleagues such as Waller who are preparing markets for the possibility of higher rates, and Trump, who has previously viewed rate hikes as politically damaging to his economic agenda and sharply criticised outgoing Fed Chair Jerome Powell for not cutting borrowing costs.

 

Warsh’s comments and approach to disputes involving the Fed, including a forthcoming Supreme Court decision on Trump’s unsuccessful attempt to remove Governor Lisa Cook, will also be closely scrutinised and compared with Powell’s strong defence of Fed independence.

 

The Fed’s next meeting is scheduled for June 16-17, when policymakers will vote on interest rates, release a new policy statement and submit updated economic projections.

 

One of Warsh’s first substantive decisions will be whether to submit a “dot” projection for where he expects interest rates to stand at the end of the year. In doing so, he will reveal whether his views differ materially from colleagues he has criticised for “groupthink” or whether he will emerge as an outlier, potentially adding to market uncertainty at a time when long-term US interest rates are already rising.

 

The Fed’s monetary policy decisions influence a range of consumer-facing and politically sensitive borrowing costs, including home mortgage rates, while its “choice” on inflation is being made in the context of public concern over issues such as $4.50-a-gallon petrol prices that remain outside its direct control.

 

Those have become visible reminders of Trump’s unfulfilled campaign promise that “starting on day one, we will end inflation and make America affordable again” — a challenge now effectively handed to Warsh.